FTSE 100 defined benefit (DB) pension schemes added just over £6bn to their liabilities last year as almost 10 changed their mortality assumptions, according to research by actuary Watson Wyatt.
The schemes raised their predictions of how long their current pensioners would live by an average 16 months. Watson Wyatt expects this to rise to an average of 21 months for members due to retire in 15 years.
The actuary says the cost of this change on companies' DB pension liabilities ranged from 2.5% to 6%.
Nicola van Dyk, a senior consultant at Watson Wyatt, says: "This was an injection of realism at a time when many companies felt able to afford it.
"They shouldered the additional cost of building in changed mortality assumptions in a year when asset returns were generally good and bond yields - which have a major impact on liability calculations - were at a high level.
“Reducing uncertainty is high on the agenda for companies and their advisers trying to manage the financial risks inherent in their defined benefit pension schemes. Longevity risk is a significant one; so is investment risk, as the impact on pension scheme assets through recent market volatility has shown."
Watson Wyatt says proposals by the UK Accounting Standards Board would increase reported liabilities as it suggests schemes should use a risk-free rate of return, such as government gilts or a swap rate, instead of a corporate bond yield.
Van Dyk says: "While it has been suggested that these ASB proposals could add around £100bn to reported liabilities, it is speculation as to whether they will be implemented and when.
"The longevity changes are, by contrast, concrete and in the here and now, and reflect an expectation of increased real cost of benefits due to members living longer, rather than a change in the approach to measurement.”
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