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Pension Funds

Lower life expectancies, discount rate tweaks could reduce U.K. pension deficits

Lower life expectancy assumptions and tweaks around calculating retirement benefits paid by companies could lower aggregate pension deficits of U.K. FTSE 350 companies by £45 billion ($62 billion), Willis Towers Watson estimated.

A model considered by the consultant uses a more recent projection of an average employee's life expectancy, which was reduced by six months for workers retiring in 20 years and could result in aggregate pension payments made by FTSE 350 companies to be smaller by some £25 billion.

While accounting standards require companies to base discount rates on high-quality corporate bond yields, corporations have been concerned which bonds to use to derive longer-term yields from market rates to be able to match liabilities.

Willis Towers Watson said refinements around converting the retirement benefits they expect to pay in the future into a single liability, which can be compared with the market value of pension plan assets, could reduce aggregate liabilities by a further £20 billion.

"Unlike reductions in life expectancy, higher discount rates do not shrink the cash payments that companies anticipate their schemes making to pensioners in (the) future — but they do mean that each £1 of future pension can be given a lower value today. The scale of the pension promises that large employers have entered into means that small technical changes can make a meaningful difference to the pension numbers on their balance sheets," said Nicola Van Dyk, director, benefits, at Willis Towers Watson, in a news release.