Good practice when choosing assumptions for defined benefit schemes with a special focus on mortality
Comments from ACCA
April 2008
ACCA is pleased to comment on the consultation document on the above. ACCA is a professional accountancy body many of whose members are involved with pension schemes in the capacities of trustee, employer, investment adviser and accounts preparer.
The changes in regulatory approach that TPR proposes to adopt are likely to have a significant impact on pension scheme financial provisions and by extension on the determination of pension costs by employers. Taken together with other current developments, including the impact of current market conditions and the accounting changes currently being consulted on by the Accounting Standards Board, the proposals on longevity assumptions are likely to have a very substantial impact on the calculation of pension liabilities and on the competitive position of UK companies. We consider that the consequences of the new TPR proposals, and the various other developments referred to above, need to be borne in mind by TPR in the way that it frames the new guidance and monitors compliance with it.
We accept that TPR is entitled to expect schemes to make credible assumptions about how long their members are likely to live, and by extension about the effect that those assumptions are going to have on the scheme's liabilities. It is right that statistical improvements in longevity be acknowledged in this process and that whatever assumptions are chosen be supported by actuarial advice. But we believe that to place too much stress in the new guidance on the adoption of very conservative assumptions on mortality would conflict with the TPR's official position, as confirmed at paragraph 1.9 of the document, that the paramount objective in the agreement of assumptions should be an 'overall' level of prudence. If this ultimate regulatory benchmark is to be retained, as we believe it should, then the new guidance must do more to place the issue of longevity assumptions in this wider context, and should clarify how TPR will relate any perceived defective assumptions to the wider regulatory goal.
Pension schemes and sponsoring employers are also, we feel, entitled to ask why so much stress is being placed on the adoption of very conservative assumptions in this area, and with respect to liabilities generally, when there is no encouragement given to schemes to recognise the appreciation in value of their assets over time.
Our main reaction to the draft guidance, though, is to question whether it is framed in a way that is going to be understandable or helpful to trustees. While the document acknowledges that the subject matter is very technical and necessarily requires the use of specialist terminology, we think that the guidance as drafted still assumes too much in the way of knowledge and experience of actuarial matters on the part of trustees. It should still be possible, in our view, to present the guidance in more accessible terms and suggest that additional efforts be made to do this. Clearly, the purpose of guidance is to help trustees - the majority of whom will not be 'professional' trustees - to perform their statutory duties and to interpret what TPR requires of them on particular issues. If the new guidance is presented in a way that comes
across as excessively technical, then the unintended consequence is likely to be that trustees, or at least many of them, will simply view it as something that should be best dealt with by their actuaries.