Transfer values from public sector pension schemes are expected to change in 2019, with experts predicting an increase in these figures.
These pension funds, such as the NHS Pension Scheme or the Teachers Pension Scheme, only allow transfers to other defined benefit (DB) schemes, as they are unfunded plans.
While the current slowdown in life expectancy is expected to drive transfer values down, an announced change to the discount rate used to assess the current cost of future payments from these schemes will have a much bigger impact in driving these figures up, explained Barry McKay, an actuary at Barnett Waddingham.
According to analysis published in December by the Government Actuary's Department (GAD), based on data from the Office for National Statistics (ONS), there was a relatively linear increase in period life expectancy between 2001 and 2011; however, since 2012 there has been very little improvement.
Period life expectancy is a theoretical measure which represents the average number of years of life that a person would survive calculated using the observed death rates at all ages for a particular year.
For the unfunded public sector pension schemes, the impact of moving from the ONS population projections based on UK experience to 2012 to those produced based on experience to 2016 is significant, the GAD explained.
All else being equal, this change in assumed future life expectancy has had the effect of reducing one of the key measures of the expected cost of providing benefits by typically around 1.5 to 2 per cent of pensionable pay for these schemes, it added.
Various member options may also be affected, for example transfer values would reduce, it noted.
Mr McKay argued that it is still unclear whether the slowdown in life expectancy is a blip or a trend.
He said: "The rate of life expectancy improvements in the previous decade was particularly high because of a reduction in smoking and reduced cardiovascular disease and the associated health improvements.
"It could be that this slowdown is a return to more normal levels of future improvements."
However, the changes announced to the discount rate by the government in September will counteract this decrease in benefits.
After a discount rate cut from 3 to 2.8 per cent in the 2016 Budget, HM Treasury has now proposed to reduce it to 2.4 per cent, "to reflect the Office for Budget Responsibility’s long-term growth forecasts", Elizabeth Truss, the chief secretary to the Treasury, has said.
Sir Steve Webb, director of policy at Royal London and former pensions minister, said public sector schemes calculated their liabilities in a different way to private schemes – future liabilities are discounted by an estimate of the growth in the economy.
He said: "Because the bulk of public sector pension costs are funded by taxpayers, the affordability of such schemes into the future depends on the strength of the economy.
"Since the government now expects the economy to grow more slowly, the burden of paying for future pension promises has increased."
Since these changes are affecting pension transfer values, the Local Government Pension Scheme (LGPS) – which is a funded scheme and allows transferring out to a personal pension scheme – has suspended these transactions.
maria.espadinha@ft.com
