People will not live as long as pension schemes are assuming, meaning the huge collective deficit is overblown by around £25bn, longevity specialist Club Vita has argued.
Club Vita, which is part of pension consultancy Hymans Robertson, has claimed that DB schemes are assuming their members will live four months longer than they actually will, pushing up estimated liabilities by billions of pounds.
The firm said this overestimate could lead trustees to request more cash than necessary from their sponsoring companies to shore up deficits.
This could result in more companies opting to close their DB schemes.
Club Vita founder Douglas Anderson said, with "rock-bottom" interest rates pushing up the cost of funding a DB scheme, trustees and sponsors could not afford to use overly cautious margins when calculating their liabilities.
"Companies with schemes facing record funding deficits in 2017 valuations will be feeling the heat," he said.
"They, and scheme trustees, should look at whether they’re taking an unnecessarily prudent approach. It could be distorting important decisions on the future strategy of their schemes.”
Mr Anderson said that, when a new fund joins Club Vita, they are generally over-valuing their liabilities by around 1 per cent, amounting to an overestimate of about four months for each member's life.
"If the same pattern was seen across all the UK’s defined benefit pension schemes, then deficits could fall by £25bn by adopting Club Vita’s methodology," he said.
"You might have expected that bigger schemes would be better at assumption-setting than smaller schemes but that’s not so, with several £1bn plus schemes overestimating liabilities by substantial amounts.”
Mr Anderson said there were three main reasons for this over-estimation: unrefined estimates that don't take account of individuals; out-of-date data; and a natural "behavioural bias to err on the side of caution in the face of uncertainty".
But he said that longevity hedging was not as expensive as many trustees assume.
Estimates of the total DB deficit vary from a few hundred billion to as much as £1trn.
In November, The Pensions Regulator's executive director Andrew Warwick-Thompson said the true figure was between £350bn and £400bn.
He denied the DB sector was in crisis, saying "screaming headlines" reporting deficits as high as £1.5trn were misleading.
Nevertheless, the vast majority of the UK's DB schemes are closed to new members, and are increasingly closing to new contributions as well.
Earlier this month, Royal Mail announced it was planning to close its DB scheme to new accruals, following the likes of Marks and Spencer and BMW late last year.
james.fernyhough@ft.com
