Defined Benefit Schemes - Living Longer?

As life expectancy increases, so too does the cost of securing an annuity. For a defined benefit scheme looking to wind-up, changes in mortality can have serious implications on an already fragile asset/liability balance. To put things into perspective: in 1911 only 100 people lived to the age of 100, in 2007 this number had increased to 9,300 (Source: Office for National Statistics).

So what is the solution? An immediate buy-out of all members' benefits through individual insurance policies would be the natural way to remove all the risk, but, in today's world, most schemes cannot afford the large premiums often associated with a sudden wind-up.

The industry has recognised the problem and has developed a number of solutions to hedge against the financial impact of people living longer. As you would expect, there is diversity among the products available and the exact level and duration of cover can vary. Two of the most recently introduced products are