In recent years much of the focus on assessing pension liabilities in corporate transactions has been based on the key financial question: “What is the appropriate interest rate on which to value the liabilities?”

However, it must be remembered that this is only one assumption of many made by the actuary in assessing the value of liabilities. Another major question has now gained fresh importance: “How long will pensioners live now and in the future?”

We are all aware that people are living longer and actuarial tables have been duly updated from time to time to reflect this and expected future improvements.

New research, however, shows an even more positive effect on future longevity than previously expected. This comes at a time when many actuaries have not yet (or have only just) moved to the last set of published longevity tables. Valuations more than a couple of years old might still be based on tables now two, and probably soon to be three, times replaced.

“the actuarial profession was slow to respond to the accumulating evidence of the 1980s and 1990s, which have seen rapid reductions in mortality rates in older age groups, ........., even today I suspect that the latest published forecast from GAD and C.M.I. understate the best estimates of future life expectancy, and will be revised up further in the next public set of figures.“
- Adair Turner, Chairman of the Pension Commission

Whilst it may be adequate for mortality assumptions to be strengthened over a period of time in funding valuations, it is clear that caution is required in transaction situations.

The table below shows what impact this might have on a scheme that is currently reported as fully funded using potentially out dated, but still in use, longevity tables:

Clearly this is an issue not to be overlooked in any due diligence.

If you would like further information please contact us via email at info@pstransactions.co.uk or by phone on 020 7839 8600. Please click here for more information on PSTS.