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Press Release

Life expectancy changes can explain lion’s share of pension surpluses in company accounts

June 3, 2024

WTW report on FTSE350 companies’ pension disclosures also finds that, for the first time ever, defined benefit scheme sponsors paid more into defined contribution schemes than into their DB plans.
Pension Board and Trustee Consulting|Pensions Corporate Consulting|Retirement

LONDON, 3 June 2024  - In a new report analysing annual reports published by FTSE 350 companies with 31 December year-ends, WTW has found that:

  1. 2023 saw the biggest ever year-on-year fall in expected lifespan for newly retired pensioners. 65- year-olds were on average assumed to live five months less long, compared with 2022 disclosures.
  1. Disclosed liabilities would be around 7% higher if companies had used the same assumptions about mortality rates in 2023 and beyond that they were using in 2014. Aggregate funding levels were 109%, so this change can explain the lion’s share of pension surpluses in these companies’ accounts.
  1. For the first time, companies sponsoring defined benefit (DB) plans paid more into defined contribution (DC) pension plans than into their DB arrangements.
  1. For the time in two decades, the proportion of schemes closed to future accrual (72%) did not increase. However, this follows a rapid rise over the previous 10 years – at the end of 2012, only 26% of these companies had closed their schemes to existing members.
  1. 61% of companies disclosed an accounting surplus. WTW expects that where pension risk is transferred to a third party, some companies might seek in advance to publish supplementary numbers to strip out any distorting effect on key metrics such as Profit & Loss and to explain further the benefits of such transactions versus the value of balance sheet surpluses.

Life expectancy

Male scheme members aged 65 were on average assumed to die aged 86.7 years, down from 87.1 in 2022. Women were expected to live to 88.5 on average, down from 88.9. These numbers have been declining since 2014.

WTW estimates that if companies still used the assumptions about mortality rates in 2023 and beyond which underpinned their 2014 disclosures, men aged 65 in 2023 would be expected to live an extra 2.2 years on average and women an extra 1.9 years. This would increase the present value of pension liabilities by around 7%. Aggregate assets at the end of 2023 were 9% higher than liabilities.

Because improvements anticipated a decade ago did not materialise, companies are projecting forward from a lower starting point and taking a gloomier view about what will happen next.”

Bina Mistry | Head of UK Corporate Pensions Consulting, WTW

Bina Mistry, Head of UK Corporate Pensions Consulting, WTW, said: “The change between 2022 and 2023 may partly reflect companies initially waiting to revise down their assumptions and then doing so once they had more data.

“Mortality experience in 2024 has so far been similar to 2014. Because improvements anticipated a decade ago did not materialise, companies are projecting forward from a lower starting point and taking a gloomier view about what will happen next.

“A recent update to the Continuous Mortality Investigation’s projections model, which employers use to set life expectancy assumptions, should lead to a further small fall in life expectancy in December 2024 accounts. However, this is very sensitive to beliefs about how much weight to put on experience in the couple of years after the pandemic. Companies looking the move pension liabilities off their balance sheets may find that insurer pricing anticipates longer lifespans.”

DC spend overtakes DB; DB plan closures pause

FTSE 350 companies in the analysis paid a total of £6.6bn to UK DC plans in 2023, compared with £5.1bn to their DB plans. This is the first time that DC spend has exceeded DB spend amongst DB sponsors.

Mistry said: “Some companies have been able to switch off deficit contributions, and 2023 did not see the big one-off cash injections reported in some earlier years. Meanwhile, more employees are in DC plans and higher interest rates have pushed the cost of funding ongoing DB accrual right down: this cost fell by almost half between 2021 and 2023.

“Cheaper accrual also helps explain why no employers in this analysis closed their DB schemes to existing members in 2023 – the first closure-free year in two decades.

“In some cases, using a surplus to pay for DB accrual will have been the only way for the sponsor to benefit from it immediately. Proposals to make it easier for employers and trustees to share surpluses could change that, depending on how they get taken forward after the election – but employers persuaded to run their schemes on for longer would have another reason to keep accrual going.

“As DC increasingly becomes ‘where the money goes’, we need more attention on how to deliver the best balance of risk and return, and on how to support members seeking to make a pot of ever-changing size last over a retirement of uncertain length.”

Investor communications in the ‘surplus era’

61% of companies analysed recorded a surplus on their balance sheet. Meanwhile, pension risk transfer transactions hit a record high in 2023.

Mistry said: “For years, the investor relations challenge for DB sponsors was explaining a large and volatile hole on their balance sheet. Now, it is more about communicating whether the company expects to benefit from a net asset, and the impact strategic pension decisions will have on this.

“Where the aim is to transfer assets and liabilities to an insurer, the way this affects key financial metrics such as Profit & Loss can depend on the circumstances surrounding the transaction, and some directors may want to publish in advance alternative metrics and encourage investors to look through any distorting effects on their headline results. Where the aim is to run the scheme on in pursuit of further surpluses, companies may need to explain what they have agreed with trustees about how and when any surpluses will be shared out especially in circumstances where these may lead to P&L losses, for example when granting discretionary increases.”

Notes to editors

WTW’s analysis covers the 85 FTSE 350 companies who both had a 31 December 2023 year-end and sponsor defined benefit pension plans. Defined benefit pension liabilities disclosed to investors in these company reports totalled £359bn.

Estimates of how 2014 mortality assumptions would translate into 2024 life expectancies are approximate, reflecting one of the ways in which the average male and female life expectancies disclosed in 2014 could have been derived. The precise effect will vary from company to company.

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