The UK Pensions Regulator is to demand that UK companies use realistic life expectancy forecasts, in a move that will add billions of pounds to pensions liabilities.

Early next week, the pensions watchdog will propose a tougher mortality standard which, it is understood, will affect 99.5 per cent of UK schemes and will increase stated liabilities for companies by 6 to 8 per cent, even for those already adopting the most cautious standard.

According to one report, for roughly a third of all schemes the increase in disclosed liabilities will be as much as 15 per cent to 20 per cent, which would probably result in them needing to set aside more cash to fill shortfalls.

The proposed standard for those retiring today at 65 assumes that men will live to at least 89 – about two years longer than the projection used in over half of current UK company schemes.

Each extra year of life expectancy increases liabilities by 3 per cent to 4 per cent.

The Pensions Regulator, which was formed in April 2005 to ensure that firms do not walk away from their pension obligations, has the power to determine levels of contributions into underfunded schemes and the timing of those payments.

Charlie Massey, executive director at the Pensions Regulator, said that while predicting life expectancy is an inexact science, he believes that the schemes are at present underestimating how longevity will stretch in the future.

It is understood that schemes will be investigated, under the terms of the new plans, if they use a life expectancy assumption shorter than one called PA92 Long Cohort – which at present adds about two years to assumptions of male life expectancy.

The regulator will also expect schemes to use projections that assume life expectancy will not suddenly stop improving at some time in the future, but will continue, albeit at a slower rate.

While it is a consultation document, it is expected that only minor amendments will be tolerated by the regulator.

Advancing age

— In 1981, the average 65-year-old British male had 14 years to live. By 1995, this had increased to 17 years, and in 2007 the figure had risen to 19.7 years. By 2027 the average 65-year-old British male is expected to have 21.5 years to live.

— As a result, the UK faces an ageing population. There are currently 9.8 million people aged 65 and over in the UK, representing 16 per cent of the population. This is expected to rise to 12.7 million, or 20 per cent, in 2021, and 16.5 million, or 24 per cent, in 2036.

— In April 2007 the FTSE 350 companies collectively had a pension fund deficit of £17.7 billion based on the calculation method at the time.

Source: The National Association of Pension Funds

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