The Pensions Regulator steps back on life expectancy proposals

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25 September 2008

Under previous guidelines The Pensions Regulator (TPR) could intervene where a pension scheme’s life expectancy (mortality) assumptions were, in its view, too low.

TPR has reversed its proposals and now agrees that it will not normally intervene if your scheme only triggers on mortality assumptions.

Generally, now a scheme must first trigger on the existing funding triggers before TPR will consider mortality in depth.

It is welcomed that the Regulator has decided to retract its proposal for a new prescriptive front line trigger. However, at the same time up to two thirds of schemes do currently trigger on the existing triggers already in place.

Accordingly a very large proportion of schemes may still be subject to the Regulator’s new secondary trigger and be reviewed on mortality.

Trustees should probably ask their advisers :

 “As there is a strong chance that my scheme will still trigger and be subject to this secondary mortality review, are our mortality assumptions likely to be acceptable?”.

Commenting on recovery plans in the current economic climate, TPR says that reasonable affordability remains a key factor. Recovery plans should also take recent economic events into account along with the company covenant and any sector specific issues.

The new approach to mortality assumptions will apply to the valuation cycle starting in September 2008, so that the first valuations to be affected will be those due to be submitted to TPR in December 2009. 

Additional Technical Background

  • TPR has reversed its proposal to call a scheme's valuation in for a closer review only because it does not use long cohort and a 1% underpin for the scheme’s mortality assumptions
  • Now mortality assumptions can be weaker than the long cohort with a 1% underpin and not necessarily trigger the Regulator’s intervention
  • The Regulator’s guidance provides that “Scrutiny of mortality will operate as a 'secondary trigger', i.e. only [used] after one of these existing factors had escalated a case for further scrutiny (rather than operating as an additional primary trigger)”
  • If the Regulator does review a valuation it will consider the requirement for prudence in the round and not assumption by assumption

When it does review mortality assumptions TPR will ask how much the:

  • cohort life expectancy at 65 of a current 65 year old is higher than the period life expectancy of a 65 year old; and
  • cohort life expectancy at 65 of a current 45 year old is higher than the period life expectancy of a 65 year old.

TPR will also take note of:

  • actuaries' concerns over short or medium cohort projections showing rapid tail off in future mortality rates which are very different to the profession's Continuous Mortality Investigation (CMI) and Office of National Statistics (ONS) data
  • the latest data, including ONS's central projection with its 1% underpin.  This recognises that, on average, the rate of improvement has been above 1% over the past 72, 42 and 22 years and that current rates of improvement are significantly higher
  • actuarial practice of addressing the inherent uncertainty in forecasting mortality improvements by relying more on strong underpins than on cohort approaches

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