Life expectancy threat to pensions

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Consulting actuaries Lane Clark & Peacock said the defined benefit schemes of FTSE 100 companies collectively had a surplus of £12 billion in mid-July.

It said this was a record improvement from the £36 billion deficit they faced at the same point last year, and was the first time since 2002 that its survey had shown schemes to collectively be in the black.

But it warned that the surplus was "fragile", and added that it could be wiped out once improved life expectancy was taken into account.

The group said many companies had updated the mortality assumptions of their schemes during the past two years, reflecting growing evidence that life expectancy is continuing to increase rapidly.

But it warned that even the updated figures, which tended to increase the amount of time scheme members were expected to live for by around 1.5 years, may not be enough as predictions for life expectancy continued to rise.

Each additional year of life expectancy adds around £12 billion to pension scheme liabilities, meaning continued rises could potentially have a big impact on the overall funding position of FTSE 100 schemes.

Bob Scott, partner at LCP said: "It is encouraging to see UK pension schemes of FTSE 100 companies report a surplus after so many years in the red. However, the surplus may not survive once companies reflect the latest mortality projections in their accounts."

The report said the record improvement in the funding position of schemes was largely due to improved stock market performance, with this contributing around £30 billion, while higher bond yields had added a further £10 billion.

It said the FTSE 100 rose by 20% in the year to mid-July, while bond yields improved by 0.5%. At the same time, the contributions companies paid into their schemes hit a new record of £13.4 billion during 2006, 19% higher than the amount paid in during the previous year.