The Pensions Regulator has published a consultation document Good practice when choosing assumptions for defined benefit pension schemes with a special focus on mortality: This includes:
- a proposed amendment to the Regulator’s practice when regulating the funding of defined benefits to implement a new approach for looking at mortality assumptions; and
- draft guidance for trustees on good practice when choosing funding assumptions for DB schemes, with particular focus on mortality; assumptions should be evidence-based and clearly and transparently described in the Statement of Funding Principles, etc, using proposed standard terminology; the Regulator emphasises that the guidance is quite technical and the trustees should ask their actuary to help them understand it.
Consultation ends on 12 May 2008.
Mortality and longevity are among the key assumptions used in calculating the scheme’s ‘technical provisions’ for funding purposes. The Regulator considers that many schemes are still underestimating the likely lifespan of their members and therefore underestimating the cost of scheme pensions, which in turn affects scheme funding.
When considering recovery plans submitted to it based on valuations with effective dates from March 2007, the Regulator proposes two new triggers for intervention; it will scrutinise and, where appropriate, discuss with trustees:
- mortality assumptions that appear to be weaker than the long cohort (year of birth) assumption and
- assumptions which assume that the rate of improvement tends towards zero, and do not have some form of underpin.
Comment: The draft “good practice” may help trustees in setting their mortality assumptions. However, the reaction from the industry to the proposed additional triggers has been largely negative; in particular, concerns have been expressed that they could lead to increased scheme liabilities, resulting in the closure of many more DB schemes.