The Pensions Regulator

Regulator sets out intentions on longevity

Ref: PN08-03
18 February 2008

The Pensions Regulator has today (Monday) published a draft statement on the regulation of defined benefit pension schemes that sets out a new approach to looking at mortality assumptions.

The modified approach, which has been developed in the light of emerging evidence, particularly over the last year, states that in the context of Recovery Plans submitted to the regulator:

• mortality assumptions that appear to be weaker than the long cohort assumption will attract further scrutiny and dialogue with the trustees where appropriate
• assumptions which assume that the rate of improvement tends towards zero, and do not have some form of underpin, will also attract further scrutiny

Supporting guidance sets out the regulator's intentions for the future regulation of mortality assumption decisions; good practice requires assumptions to be evidence-based and clearly and transparently described.

Chief executive Tony Hobman said: "Over the past couple of years there have been significant developments in our knowledge of trends in mortality. It is the regulator's view that some projections that have been in common use can no longer be considered reasonable assumptions. We wish to bring these developments to the attention of trustees and outline how they should go about deciding on funding assumptions for defined benefit schemes.

"Scheme members living longer adds to the cost of pensions and it is right that schemes recognise this in their funding."

Both the amended approach and the guidance are subject to industry-wide consultation. This follows an important and successful longevity conference with key members of the actuarial profession last year hosted jointly by the regulator and the Board for Actuarial Standards. The consultation will last for 12 weeks and ends on 12 May 2008.

Editor's notes

• The proposals will apply to Recovery Plans based on valuations with effective dates from March 2007.
• Important work by the Government Actuary's Department, the Continuous Mortality Investigation (CMI) of the Actuarial Profession and the Office for National Statistics has for a number of years been highlighting rapid reductions in mortality (increases in longevity). This evidence is discussed in detail in the Annex to the guidance in section 2, referencing important publications by the CMI, for example in 2001 and 2004.  In July 2007 the two presidents of the actuarial profession noted that the high rates of improvements in mortality that had persisted since projections issued by the CMI in 2002 meant that assuming a very rapid tail-off in future rates of improvement in mortality showed a very different pattern from their recent published data and that of the Office for National Statistics.  At the time, the regulator welcomed this important statement.
• In September 2007 the regulator published its initial analysis of filed recovery plans.  In line with the statement from the actuarial profession and the growing evidence base on mortality, the regulator said that it would expect future recovery plans to reflect the latest data suggesting that mortality is continuing to decline at historically high rates.
• In valuing their own liabilities for the purpose of their 31 March 2007 accounts, the Board of the PPF have chosen to assume mortality improvements in line with the long cohort projection with an underpin (1.5% pa for men, 1% pa for women).  The 'Purple Book II' (Dec 2007) highlighted evidence on mortality, showing that two years of extra life could add 5% to pensioner liabilities.  In a consultation launched in February 2008, the PPF have taken current market experience, and in accordance with their principle of deliberately erring on the side of optimism, have decided that s179 valuations should be based on a mortality assumption of medium cohort with a 1% underpin.
• The Pensions Regulator has worked closely with the Pension Protection Fund and the Board for Actuarial Standards in the development of the Consultation Document.
• The Pensions Regulator is the regulator of work-based pensions in the UK, with wide-ranging and flexible powers under the Pensions Act 2004.
• The powers of the Pensions Regulator include the ability to:
  • collect more detailed scheme information;
  • issue improvement notices and third party notices, enabling the  regulator to ensure problems are put right;
  • freeze a scheme that is at risk, while the regulator investigates;
  • prohibit trustees who are judged not fit and proper to carry out  their duties.

The Pensions Act 2004 also imposes a statutory obligation on  'whistleblowers' to report suspected breaches of the legislation to the regulator.