On 18 February, the Pensions Regulator published a consultation document containing draft guidance on how trustees should approach their decisions on funding assumptions for defined benefit pension schemes. The paper focuses, in particular, on mortality assumptions and sets out two key thresholds in respect of recovery plans based on valuations with effective dates from March 2007:
- Mortality assumptions which appear to be weaker than the long cohort assumption "will attract further scrutiny and dialogue with the trustees where appropriate"; and
- The Regulator will scrutinise mortality assumptions which assume that the rate of improvement tends towards zero, and which do not have some form of underpin.
The draft guidance makes it clear that the Regulator expects later tranches of filed recovery plans to show a move to a strengthening of the assumptions used. The trustees will need to demonstrate that the assumptions used for future improvement are of sufficient strength overall; and the draft guidance notes that they will not normally have good cause to be scheme specific unless a scheme's own experience is very extensive and sufficiently stable.
The draft guidance also gives more detail on the principles which trustees should apply when considering assumptions:
- All assumptions must be chosen prudently. The Regulator interprets prudence as "taking a margin on the cautious side of a best estimate (or expected value)".
- Evidence should form the basis of justification for all assumptions.
- The degree of prudence adopted can differ between assumptions in order to achieve a target level of
- prudence in the technical provisions as a whole.
- Trustees should discuss with their actuary how sensitive the technical provisions are to changes in the value of each assumption.
- Although trustees are the decision makers, they must take advice from the scheme actuary on, amongst other things, best estimates and on appropriate margins for prudence.
- Trustees must understand the funding assumptions they have adopted and the reasons for their choice.
- For a scheme which does not have a sufficiently large membership for the analysis of the scheme's own mortality experience to be statistically significant, the choice of appropriate tables will need to be guided by factors known to be correlated with observed mortality, or proxies such as: the average amounts of pension;
- the employer's industry; and
- the residential location of the membership.
The Regulator will publish final form guidance and a statement of its regulatory approach following the end of the 12 week consultation period. The consultation document can be viewed on the Regulator's website here.