UK - The UK Actuarial Profession has unveiled a prototype mortality model for projecting increases in life expectancy which it believes will better reflect recent mortality rates and trends.

Working Paper 38 and a guide explaining the new model have been produced by the Continuous Mortality Investigation (CMI) for a consultation by the Actuarial Profession, and are designed to move actuaries away from the single set of projections known as the Interim Cohort towards the new model which is described as "relatively straightforward to understand and describe".

The Interim projection model with short, medium and long-term cohorts has been widely adopted since its launch in 2002 but officials "became concerned" last year about the mainstream use of the existing model without reference to other scenarios, especially as it is now considered to be out-of-date and suggesting a rapid decline in improvement rates when there perhaps is not.

The existing Interim Cohort projection assumed an eventual fall in the rates of mortality improvements from the high levels seen in 1999, noted the AP, yet "continued high rates of mortality improvement mean that the Short and Medium Interim Cohort projections in particular imply a rapid tail-off in rates of improvement in future mortality from today's levels" according to the body, "and show a very different pattern from the most recent date published by the CMI and ONS".

This new model, which operates from a spreadsheet with ‘core' and ‘advanced' fields in calculation - the core fields acting as general default values while advanced fields give more flexibility for changes to the projection - is designed to deliver a single, deterministic mortality projection for each set of user inputs and be based on the projection of annual rates of mortality improvement, or the pace of change in mortality rates.

Moreover, it assumes that recently observed, or current, changes in rates will blend over time into the long-term rate specified by the user and the long-term rate will therefore reflect the fact that the forces driving mortality changes will be very different from those influencing longevity improvement patterns today.

Working group officials argue long-term rates would be better-informed by expert opinion while short-term rates should reflect recently-recognised experience.

The 35-page working paper is accompanied by a 24-page guide to using the projection model, and explains not all stochastic models and research have been analysed ahead of the consultation, but authors say there is plenty of evidence to suggest most experts, actuaries and pension fund trustees are using medium or long cohorts for regulatory reporting of annuity liabilities so improvements were needed to ensure an "infinite set of possible projections" can be created for portfolios.

Consultants in the industry have already hailed the new model proposals as being an improvement to the existing practice of using cohorts modelling which are no longer considered to be accurate.

Joanne Livingstone, principal and actuary at Punter Southall, described the publication of proposals as "a landmark in shifting debate about the appropriate projections to use away from the old cohort projections".

She added: "The model and the working paper that accompanies it will be important tools in explaining to trustees the range of possible future longevity improvements that might apply to the members of their scheme and the implications for the funding of that scheme".

Mike Smedley, partner at consulting KPMG, also said the changes should lead to "less reliance on extrapolating the recent past and more transparency in this highly subjective area" while noting sponsors were likely to be pleased with the prototype because it does appears to add pressure to pensions funding levels.

Martin Bird, head of longevity solutions at Hewitt Associates, described the value field inputs as "intuitive" and suggested it should give trustees more confidence when attempting to develop longevity swap transactions.

The Actuarial Profession will host meetings in Edinburgh and London next month to discuss the proposals, and the consultation will close on 31 August, 2009, so the working group can prepare a final version of the model in October. A more detailed second working paper will also be issued in the near future to explain the construction of the model and parameters.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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