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How corporate pension liabilities could vary by 10% or more, even on an agreed set of assumptions

(Posted by Patrick Lee on 1 August 2017 at a different location, but migrated here on 05 Feb 2018).

Why is there a range of answers, even using a given set of assumptions? Are these differences real, or artificial?

It would clearly make a difference whether a company’s pension liabilities were £475m, £500m or £525m …

The value of an organisation’s defined benefit (final salary or CARE – career average revalued) pension plan promises normally depends on many uncertainties, including:

  • how long the plan members and their partners are expected to live
  • what proportions of active members will leave service, or retire on ill health, before reaching normal retirement age
  • what the future rates of salary growth and price inflation (and hence pension increases) will be
  • assuming that a perfectly matching asset portfolio can’t be found (normally such a portfolio doesn’t exist), then what the future rates of reinvestment (for cashflow mismatches) will be.