The Pensions Regulator

Mortality assumptions

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Introduction
General principles for choosing assumptions
Mortality assumptions and the role of trustees
What trustees need to consider with the scheme actuary
Illustrating and presenting the impact of mortality choices
Offsetting adjustments in other assumptions
Disclosure matters and terminology
Sources of information
Legislative references

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Introduction

1. The scheme funding requirements of the Pensions Act 2004 centre on the value to be placed on a scheme's accrued liabilities, known as 'technical provisions'. As with any actuarial calculation, technical provisions require assumptions to be made about the future course of all those factors affecting the cost of providing the benefits. These assumptions must be chosen prudently. Trustees must obtain actuarial advice before choosing assumptions and, subject to certain exceptions governed by the scheme rules they must obtain the agreement of the employer. Key assumptions will include inflation, investment return and how long scheme beneficiaries are expected to live (longevity). A mortality rate refers to the assumed probability of dying within a year whereas longevity usually refers to the future expected lifetime derived from any particular set of mortality rates.
2. We issued 'Code of practice 03: Funding defined benefits' ('the Code'), providing practical guidelines and setting out expected standards of conduct and practice for those who must meet the legislative requirements under part 3 of the Pensions Act 2004.
3. We now have experience, from recovery plans submitted, of how trustees have interpreted the funding requirements of the legislation and the Code. In September 2007 we published 'Recovery plans: an initial analysis'. There have also been significant new developments in the field of mortality relevant to pension scheme funding, particularly those highlighted by the Continuous Mortality Investigation of the actuarial profession (CMI).
4. Accordingly, we believe it opportune and helpful to issue some additional guidance on choosing mortality assumptions. The general principles, including those relating to prudence, are of application when considering the adoption of any assumption, though this guidance focuses on mortality.
5. We expect trustees to follow a robust process for choosing assumptions, which would typically include the following elements. These elements are also relevant to trustee discussions about funding decisions more generally:
   • the trustees involved (who might perhaps be members of a sub-committee selected for the purpose) should have familiarised themselves with the main issues;
   • the trustees should identify, in discussion with the actuary, those aspects about which decisions need to be made;
   • they must obtain advice from the actuary about the aspects identified; and
   • they should have documented their reasons for the decisions made.
6. We acknowledge that different processes and decisions are likely to be appropriate for small schemes and these are commented on further in the relevant sections below. A particular issue for small schemes is that quite often significant liabilities are concentrated in relatively few members and hence inherent variability of individual outcomes is not reduced to the extent it usually is in larger schemes.
7. Whilst the guidance is directed to trustees in view of their statutory responsibility to set assumptions, we understand that much of the material in this guidance will be unfamiliar to many trustees and is necessarily quite technical in places. Trustees should seek input from the scheme actuary to help their understanding. We will review this guidance as necessary and in the light of developments in the market, and will continue to work with all the relevant authorities such as the Board for Actuarial Standards (BAS), the actuarial profession and the CMI.

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