Assumptions are needed in order to make an actuarial calculation of a prudent reserve to hold in a pension scheme against the pension promises employers make to their employees. This reserve is not designed to eliminate all risk but neither is it simply a best estimate of the amount needed to provide for the benefits. The degree of prudence incorporated into the funding reserve will depend on individual circumstances and is a matter of judgement for the trustees of each scheme, but the regulator has a responsibility to inform decisions.
Assumptions about mortality have been a matter of much debate, with the emergence of evidence over a number of years that past allowances for future improvements in life expectancy have been inadequate. This is increasingly being recognised. Indeed at the time of writing, a survey by a leading actuarial firm has revealed that nearly half of the FTSE 100 companies with defined benefit schemes have changed their mortality assumptions for accounting purposes, adding perhaps £6bn to their pension liabilities.
We recognise that those whom we regulate need a degree of certainty about how we will carry out our functions and exercise our powers. This will enable them to understand when and how we may intervene and also what they need to do to protect pension scheme members. We propose to amend our approach when reviewing schemes’ funding plans. We also recognise that what we say may influence the actions of employers, trustees and their advisers.
