The Pensions Regulator

Regulator publishes response to longevity consultation

Ref: PN08-20
23 September 2008

The Pensions Regulator today published its response to the recent consultation on good practice in selecting mortality assumptions for defined benefit pension schemes.

The regulator announced earlier this summer that, in response to feedback from the industry, it was deferring the introduction of its new approach. Today's full response:

• confirms mortality assumptions will only be scrutinised where a scheme is flagged up by an existing trigger;
• reiterates that the regulator's approach will not be based on any one approach, with a range of different measures able to achieve equivalent outcomes;
• highlights that as always recovery plans are governed by payments that are reasonably affordable;
• releases guidance for trustees on the process for determining mortality assumptions; and
• restates the change in date of introduction to valuations due from September 2008 (as announced on 21 July).

Announcing the approach, Pensions Regulator chairman David Norgrove said: “Our consultation has sparked a lively and much-needed debate on the impact of longevity on pension scheme funding. We have listened with interest and taken on board the responses to our consultation.

“Nobody is disputing the evidence on continuing mortality improvements – people are living longer and this will impact upon pension scheme costs. Despite some of the headlines, our focus is on achieving clarity over how pension schemes recognise the accrued costs of their existing liabilities – and not about identifying new costs or imposing new duties.

“I hope that the industry will welcome our guidance, coming as it does at the start of a new valuation cycle.”

The original consultation made clear that the description of 'long cohort' and 'underpin' was to highlight the issue of rising longevity, and not to outline one prescribed approach. However, concerns raised that the regulator mentioning one approach could lead to unnecessary or inappropriate actions were taken seriously.

While using the long cohort with some form of underpin is one option, a medium cohort assumption with a stronger underpin would clearly be equivalent, as would no cohort assumption with an appropriate underpin.

In relation to the wider scheme funding regime, the regulator acknowledges that employer circumstances may change, and maintains that the best guarantee for any occupational pension scheme is the ongoing support of a viable employer.

Recovery plans take into account the general economic climate, the company covenant and any sector specific issues. Therefore we would expect new recovery plans to reflect current economic conditions in terms of what is reasonably affordable. For recovery plans that are already in place our existing scheme funding code of practice states that trustees should consider reviewing and, if necessary, revising plans where there is a significant improvement or decline in the employer's covenant.

Editor's notes

1. Alongside the longevity consultation response document the regulator has published good practice guidance for trustees when choosing mortality assumptions for defined benefit pension schemes, available on our website.

2. Scrutiny of mortality will not be through an additional trigger. Rather, mortality assumptions will be considered only after a case is escalated for further scrutiny on existing triggers, for example recovery plan length or technical provisions (as set out in the regulator's 2006 statement on how it would select recovery plans for further review).

In these cases, the regulator will look more closely at the mortality improvement assumptions adopted by the scheme by looking at 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.

3. The regulator's final approach will come into force at the start of the next valuation cycle (from September 2008 for Recovery Plans in December 2009).

4. In assessing mortality assumptions used the regulator will take note of the following:

• Concerns expressed by the Faculty and Institute of Actuaries over the 'short' or 'medium' cohort projection showing rapid tail off in future mortality rates very different to CMI and ONS data;
• Latest data from CMI and ONS, including the ONS central projection which has an underpin of 1%. This takes into account that the rate of improvement has been above 1% on average over the past 72, 42 and 22 years, and that current rates of improvement are significantly higher;
• Practice, for example in the insurance industry, to address the inherent uncertainty in forecasting mortality improvements by having a stronger underpin rather than using cohort approaches on their own.

5. Research after the '92 series' mortality tables revealed marked improvement rates for pensioners born between 1925 and 1945. CMI therefore published three different adjustments to the '92 series' tables assuming continuation of this higher rate of improvement over a number of years (after which the rate of improvement follows the underlying table):

• the short cohort, assuming the additional improvement until 2010;
• the medium cohort, assuming the additional improvement until 2020; and
• the long cohort, assuming the additional improvement until 2040.

Underpin % is a minimum improvement in a yearly rate of longevity improvement.

6. The regulator's consultation document, Good practice when choosing assumptions for defined benefit pension schemes with a special focus on mortality, was published on 18 February 2008. It suggested that schemes should be transparent and evidence-based when considering longevity, and noted evidence points to more rapid future improvements in life expectancy than many schemes currently assume. The document also set out a suggested approach for taking longevity into account as part of the scheme specific funding regime already in operation.

7. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to:

• collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
• issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
• direct pension schemes as to how to calculate their liabilities and the contributions required;
• issue a contribution notice where there is a deliberate attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.