UK's Ageing Workforce Means Firms Will Have to Pay £1.8m Extra in Pensions

UK businesses will have to spend an extra £1.8m on average to cover the costs of ageing workforces, according to Mercer.

The financial services firm, which surveyed 202 defined benefit pension schemes (based on an employee's final salary schemes), said a company with a DB plan, with £100m ($162m, €128m) in liabilities, will need to find an additional £1.8m because members are expected to live six months longer than estimated in 2011.

The forecast is based on the assumption that on average women aged 65 (the former default retirement age) will live an additional 25 years and six months to a total age of 90 years and six months.

Men aged 65 are assumed to live an additional 23 years and four months reaching a total average age of 88 years and four months.

In contrast, in Mercer's 2011 Valuation Survey, trustees were assuming that men who are now aged 65 would live until 87 years and 10 months.

"Member longevity is one of many critical risks impacting the financial health of a DB pension scheme, but it's very hard to anticipate with any confidence. It's possible there is no end in sight to the increases," said Dr Deborah Cooper, a partner at Mercer.

"Whether the money to pay for the increases comes from asset performance or company contributions, it's a further ratcheting up of the financial pressure on companies as their exposure to risk stretches over a longer period.

"Consequently, trustees and employers need to look for ways to manage the financial consequences of increased longevity."

The findings come after the Office for National Statistics said there were 27.9 million people in workplace pension schemes in 2013, up by 300,000 compared with 2012.

The numbers contributing, or having contributions paid into a scheme (active members), rose slightly from 7.8 million in 2012 to 8.1 million in 2013

The research also revealed that contribution rates to DB schemes (having excluded deficit reduction payments) remained higher than for defined contribution schemes – based on how much an employee invests into a pension pot.

For private sector DB schemes, the average contribution rate was 5.2% of pensionable earnings for employees and 15.4% for employers.

For private sector DC schemes, the average contribution rate was 2.9% for employees and 6.1% for employers.