As we discussed earlier in the month, “liability-driven investing” is often viewed as an enlightened approach to managing pension plan assets.  After all, what’s the use of beating an S&P 500 bogey when a plan’s liabilities are rising due to fluctuations in exchange rates or other factors.  Some pensions have opted to fully insulate themselves from the volatility of its liabilities by hedging away the financial risks that cause it.

But there are a few factors that can’t easily be hedged.  Chief among them is “longevity risk” - the risk that retirees live longer than the pension plan had expected.  This has put the spotlight on the mortality assumptions underpinning pension plans.  Apparently, since we stopped smoking during pregnancy and allowing our kinds to eat lead paint, we’re all living a lot longer.  Still, predicting the future of the human lifespan has been devilishly hard and remains open to opinion.

Last week British pension regulators tried to standardize things a little – and, it hopes, prevent pension plans from using overly pessimistic mortality predictions in order to reduce funding shortfalls.  This article on the British Telecom pension plan says that the new regulations would immediately put the plan into hawk – knocking it from a slight surplus to a 2 billion pound deficit:

“Problems could widen further, according to [industry consultant John] Ralfe, as he believes ‘BT’s longevity assumptions remain weak’ so were the fund to state its mortality assumptions as being ‘medium cohort’ – i.e. two years longer than currently stated – the assumption is this would increase liabilities by £3bn to £45.9bn – 18% higher than currently reported.”

Specifically, the UK pension regulator (known officially as “TPR” for “The…Pension…Regulator”) said it would now keep a closer eye on plans that use over pessimistic mortality assumptions or that assume the century-long rise in longevity will eventually come to an end.  Warned the regulator:

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