LONDON: Companies running pension funds will find it harder to ignore Britain's rising longevity in 2007, while pension liabilities will continue to be significant in merger tussles, industry figures say.
Longevity risk — the chance that a pension fund may run short of money because people live longer — is probably the biggest challenge facing Britain's corporate pensions next year, Peter Redhead, managing director at Pension Capital Strategies.
"Auditors are becoming aware of it and starting to question what it does to liabilities," he said. "To date, because it has not been necessary to disclose mortality assumptions, many companies have just buried their heads in the sand."
Consultants also said pensions would remain a significant element of merger and acquisition cases and that recent enthusiasm for alternative assets such as private equity may wane if returns sag.
How pensions handle longevity risk, however, was the most common talking point for consultants and analysts who gave their predictions about Britain's corporate pension industry, which is estimated by UBS, the Swiss bank, to hold about £750 billion, or $1.46 trillion, of assets in 2005.
The profile of longevity risk is a lot higher than it was six or even three months ago, Redhead said. "The major auditors are all discussing this question," he said.
The deficit in final-salary pension plans of Britain's top 100 listed companies could be more than £100 billion, about £60 billion more than current estimates, because companies have underestimated longevity, PCS said in October.
A British man aged 65 by the middle of this century, for example, will expect to live for nearly another 20 years, compared with 12 years in 1950, according to the British Government Actuary's Department.
Longevity is also straining pension systems in countries like Japan, Italy and Germany, where the general population is aging and living longer.
Pension liabilities are likely to play an important role in merger and acquisition tussles, because deficits, which are accounted for like debt on company balance sheets, can affect the price of a target firm or even kill off deals, said Paul Jayson, a partner at Barnett Waddingham, a consulting company.
In April, the Spanish construction company Grupo Ferrovial, which later bought the airport operator BAA, held talks with BAA's pension trustees as part of its negotiations.
The new Pension Regulator, which has the power to make companies shoulder their pension obligations, is still looking to see how far it can go in wielding its power, said Con Keating, principal of Finance Development Centre, a research organization.
"The regulator is still young, and any such regulator is at odds with its constituency in its early days," he said.
Keating expects no major shift in the trend away from defined benefit pensions in 2007.
http://www.iht.com/articles/2006/12/18/business/pension.php
