Wrong mortality forecasts put buyout pension scheme members at risk

Companies that specialise in buying out pension schemes from employers could be forced to cut back benefits paid to savers if key forecasts around life expectancy are proved wrong, actuaries have warned.

The Board for Actuarial Standards says there needs to be far greater transparency over how forecasts over life expectancy are constructed and applied by financial services companies.

In recent years there has been a marked improvement in life expectancy and a consequent decline in mortality rates. Launching a discussion paper on mortality assumptions, Paul Seymour, chairman of the BAS, said the financial services sector needed to discuss the huge implications if this trend continued, or if it was reversed.

In simplistic terms if life expectancy continues to improve pension firms risk setting contribution levels from individuals too low with a  potential grave impact on their finances.

It also warns, 'buyout operators other than insurance companies, ie who are not regulated by the FSA, might scale back the benefits paid for the schemes they have taken on. If this happens, members may receive less than their full pension entitlement.'

Alternatively, if mortality rates do not continue to improve and more people die than expected in future, pension firms and employers could set contribution rates too high, which could lead to further scheme closures.

Similarly life insurers could set premiums for protection policies too high if life expectancy improved.

Seymour said: 'We need to hear from the pension scheme trustees and insurance company directors who necessarily make decisions based on assumptions about mortality. They need information which can assist them to understand risks. Actuaries providing advice must focus on how best to communicate the choices to be made, the uncertainty surrounding them and their implications.'