TPR to introduce mortality funding 'trigger'

UK - The Pensions Regulator (TPR) has confirmed it intends to consult on the introduction of a "trigger" for pension scheme valuations based on mortality assumptions.

TPR currently uses two "triggers" in the new scheme specific funding regime, relating to the technical provisions and the recovery plan, to help it focus its attentions on the schemes "most likely to require further consideration".

However, in September Tony Hobman, chairman of TPR, highlighted longevity assumptions being submitted by trustees in scheme recovery plans did not reflect what "might be considered prudent", adding "we would expect future plans to take into account recent arguments for strengthening assumptions".

As a result, TPR has confirmed a consultation, on the development of a new trigger based on mortality assumptions, will be published on Monday.

Charlie Massey, executive director of strategic development at TPR, yesterday revealed at the conference 'Managing Demographic Risk: The Next Challenge for UK Pensions' the trigger would be "mortality improvements which appear weaker than the long cohort projection, or without an underpin".

The"long cohort" projection method is a fixed mortality projection based on the "cohort" of pensioners born, broadly speaking, between the two world wars whose longevity appears to be improving at a faster rate than those born earlier.

Short, medium and long-term projections have been developed by the actuarial profession to estimate improvements in mortality/life expectancy based on whether the increase continues into people's 80s, 90s, or beyond.

However, Hewitt Associates has warned TPR against "tying itself and pension scheme trustees up in red tape by introducing any more triggers".

Martin Lowes, pensions consultant at Hewitt Associates, said the firm supported the principle of a series of tests relating to assumed improvements in longevity, but suggested it would be more helpful if TPR designed the trigger in terms of the percentage increase in longevity rather than relating it to one particular longevity projection method.

"Such an approach would make it easier for TPR to judge whether assumptions about future mortality improvements adopting different approaches satisfy their trigger," added Lowes.

Jane Beverley, principal and head of research at Punter Southall, also expressed concerns about the choice of trigger, as she pointed out while the long cohort is the strongest cohort projection - which would probably increase some scheme's liabilities - it is also considered "slightly old-fashioned", as it provides a single projected rate of future improvement.

She said: "There are more sophisticated projection methods out there which give trustees a range of possibilities and highlight the uncertainty of future mortality improvements."

"It is a concern that by choosing the long cohort or a fixed projection method as a trigger, TPR will discourage trustees from investigating the range of possibilities," added Beverley.

As many schemes currently use a medium cohort projection, Lowes suggested TPR should set the proposed trigger at a level "which affects the minority of schemes" to help it focus its efforts, as he warned the firm would "not support a trigger solely related to use of the long cohort projections".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com