The Pensions Regulator

Code of practice 03
Funding defined benefits

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Meeting the key statutory obligations

Advice on assumptions

79. The following matters relating to the assumptions should be covered by actuarial advice and discussed with the employer:
    • a range of values or options for each assumption. When considering these, the trustees should ensure they understand the evidence for, and rationale behind, the choices put forward;
    • sensitive assumptions, where even small deviations in the experience from the assumed values have a significant impact on the adequacy of the technical provisions;
    • the current price of UK government securities and the information this provides about the expected return on investments which are low risk in relation to the liabilities;
    • relevant economic and financial factors such as price and wage inflation, and the expected returns on, and risks associated with, asset classes other than UK government securities;
    • the trustees' investment policy and the extent to which the expected returns on, and the risks associated with, actual investments held should be reflected in assumptions about investment returns;
    • factors particular to the employer, or the employer's industry, affecting matters such as pay increases, rate of withdrawal from membership and recruitment, etc;
    • for schemes open to new members, the implications of those assumptions as to age, sex and number of new joiners for future contributions; and
    • the effect that changes to economic conditions might have on the relative levels of funding and solvency.

Mortality

80. Particular attention should be paid to assumptions about future mortality. Here the experience is of a sustained trend in one direction, that of longer life expectancy (ie decreasing mortality rates). Trustees should consider with their actuary the latest available relevant data on likely future mortality rates.
81. In their application to a particular scheme, it might be appropriate to adjust standard mortality tables to reflect scheme, employer or geographic factors where evidence exists to support this. Consideration should be given as to the likely persistence of these differences in the future.

Estimated scheme solvency

82. When considering the assumptions to be adopted for the calculation of the technical provisions, trustees should discuss with their actuary the relationship between those assumptions (particularly investment return and mortality) and the assumptions which the actuary will use in the estimate of the scheme's solvency (which must be included in the actuarial valuation).⁶⁹
83. The actuary's estimate of the solvency position, and the assumptions underlying the calculations, are useful reference points for trustees and the employer when considering the adequacy of the technical provisions.

Prudence of assumptions taken together

84. Trustees should choose individual assumptions with a level of prudence consistent with the overall confidence they want to have that the resulting technical provisions will prove adequate to pay benefits as they fall due.
85. The trustees must consider whether, and if so to what extent, account should be taken of a margin for adverse deviation when choosing prudent economic and actuarial assumptions.⁷⁰ To inform this choice trustees should discuss with their actuary both the range of potential values and the likelihood of their being experienced so as to determine the appropriate margin (if any) to take over best estimate values.
86. Whilst technical provisions should represent a prudent reserve to hold against a scheme's future liabilities, trustees are not obliged to attempt to eliminate all risk that they will fail to be sufficient. In particular, legislation does not require technical provisions to be set at the level needed to buy out accrued liabilities with an insurance company.

Pension Protection Fund levy valuation

87. Trustees should also be aware of the separate valuation for Pension Protection Fund levy calculation purposes.⁷¹ This indicates the ability of the scheme to provide benefits in excess of the Pension Protection Fund compensation level in the event of employer insolvency. This valuation and the stipulated assumptions will provide the trustees with further useful points of reference when considering the adequacy of the technical provisions.⁷²

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