Role of mortality assumptions in pension scheme funding to be reduced

The Pensions Regulator has announced that mortality assumptions will not play a primary role in the funding of pensions schemes.

The regulator’s response document to the consultation Good practice when choosing assumptions for defined benefit pension schemes with a special focus on mortality said that mortality assumptions will only be scrutinised †where a pension is flagged up by an existing trigger, such as recovery plan length or technical provisions.

In such cases the regulator would more closely examine 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. The regulator would also seek to establish whether the cohort life expectancy at 65 of a current 45 is higher than the period life expectancy of a 65-year-old.

“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 accrued costs of their existing liabilities – and not about identifying new costs or imposing new duties”, explained David Norgrove, chairman of the Pensions Regulator

Watson Wyatt, however, has said that although the regulator’s revised approach to mortality assumptions may be portrayed as “climb down” it could still succeed in putting the “frighteners on schemes where there is more risk that members’ benefits might not be paid in full.”

“Schemes whose valuations were always going to generate questions form the regulator have been told their mortality assumptions will come under scrutiny. The hurdle will not be a low one, so the consequences of being on the wrong side of an existing trigger have increased. However, the regulator appears willing to accept allowances for life expectancy improvements that differ according to the age and sex of scheme members”, said Paul Kitson, a senior consultant at Watson Wyatt.

The regulator has also published good practice guidance for trustees when choosing mortality assumptions for defined benefit pension schemes.