It is not often that we can pass on good news in the context of DB pensions schemes. However, this summer there are two issues which will cheer many employers and trustee boards as they depart for their annual leave:
- Relaxation on mortality assumptions and clarification over solvency valuations.
- An announcement from the Pensions Minister that the compliance regime for existing defined contribution schemes’ Personal Accounts will be modified.
It is, of course, good news that we are all living longer but this can have a significant impact on DB liabilities if longevity assumptions do not reflect current trends in mortality. This is a fact that the Pensions Regulator emphasised back in February this year in its consultation on a proposed new approach to looking at mortality assumptions. The proposals were originally intended to come into force from March 2007 and the retrospective nature of the proposed changes caused much controversy, given that some valuations would already have been underway and may have had to have been restarted in line with the new mortality guidance. However, the Regulator has this week announced that it is delaying the changes until the start of the next DB scheme valuation cycle beginning in September 2008. Given the 15 month period within which a valuation must be finalised, this will affect valuations and recovery plans due from December 2009. It remains to be seen whether the Regulator will stand behind its proposal to create a new funding trigger based on mortality assumptions that appear to be weaker than the long cohort assumption or which assume that the rate of improvement tends towards zero. Some in the industry have criticised this approach for being overly-cautious and running counter to the scheme-specific philosophy of the new funding regime. The Regulator says it will take time to consider fully all responses received before deciding on the best way forward and will release a final version of the proposed changes over the summer. In the meantime, trustees may want to start thinking about the extent to which decisions on longevity could be based on their own scheme-specific experience.
Valuations falling within the new scheme-specific funding regime must contain the actuary’s statutory estimate of solvency which is based on an estimate of the cost of buying out the scheme’s benefits in the insurance market. According to published actuarial guidance, when valuing the accrued rights and liabilities, the actuary may use the actual buy-out cost or an estimate of the buy-out cost likely to be adopted by an insurance company. However, where market conditions change such that solvency assumptions chosen strictly in accordance with the actuarial guidance would produce higher liabilities than could be achieved under current market conditions, trustees may wish to consult with their actuary to see if a more realistic valuation can be adopted. Professional guidance still requires the actuary to ensure that this is clearly explained in the valuation. The benefit, of course, in adjusting solvency assumptions in this way is that it could lead to a reduction in stated liabilities.
Personal Accounts Exemption
Finally, another welcome sign that concerted efforts by the pensions industry can bring common sense to bear with the powers that be has emerged in connection with the Pensions Bill. The Pensions Minister, Mike O’Brien, has indicated that he has listened to concerns that the test proposed for “qualifying earnings” (which will have to be met by employers whose defined contribution schemes are to be used to exempt them from joining the Personal Accounts Scheme) will incorporate wording which will look at the overall quantum of contributions rather than the narrower issue of whether the scheme uses the same definition of gross earnings which the Personal Accounts Scheme will use.