UK - Income from private pension schemes could fall from an estimated 6.1% of UK GDP in 2012, to 5.9% by 2032, if life expectancy increases in line with projections, according to the Pensions Policy Institute (PPI).

The ratio was calculated using population projections from the Office for National Statistics (ONS) and using several different scenarios.

A 1% improvement in mortality per year at each age would lead to a 66% increase in the population aged 65 and over between 2006 and 2032 (the "principal mortality variant"). That increase would rise to 71% if mortality improves by 2% per year at each age (the "high life expectancy variant").

But according to the PPI, recent experience has suggested improvements in mortality of around 3% per year at each age (the "very high life expectancy variant"), leading to an expected 77% increase in those aged 65 and over during the same timeframe.

Using these forecasts as a basis, the PPI has calculated that private pension income could equal 5.9% of GDP under both the principal and high mortality projections. The very high projection would see income equal 6% of GDP. This is in contrast to an estimated income in 2012 of 6.1% of UK GDP. 

However, these calculations assume that private pension providers for DC schemes would adjust their annuity rates in response to changes in life expectancy.

But the PPI says that if private pension providers do not change their annuity rates accordingly, private pension income could increase to 6% of GDP under the high projection, and 6.2% of GDP under the very high projection.

Even if annuity providers for DC schemes adjust their rates downwards, the total amount paid out to pensioners would rise slightly because of the assumed increase in GDP over time.

The research was carried out by the PPI, using additional information on very high life expectancy from Professor Mike Murphy of LSE.

According to Chris Curry, research director, PPI, the research shows how sensitive the income projections are to different assumptions around life expectancy, which in turn would help policymakers determine whether options are affordable or not.

"We have tried to show that the amount of income people might get in return for pension saving is not only determined by the amount they have saved, but also by what is happening in the population as a whole," he says.

But he warns that the "private pensions cake" could end up being shared by a much greater number of people than at present.

He says: "If annuity prices change, there will be very little difference in the total amount paid out to DC scheme pensioners, but it will be paid to a much larger group of people. That means individual pensioners will get far less from their private pensions, and rely more on the state pension."

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