Spence & Partners latest blog for Pension Funds Online:
The Pensions Regulator’s annual funding statement for 2016 includes the following comments about the latest mortality projections available:
“The 2015 version of the Continuous Mortality Investigation model (CMI2015) produces life expectancies that are lower than the 2014 version. We would consider it reasonable for trustees who use data from the CMI, to update to CMI2015 if they wish. However they should consider with their advisers what the effects would be if this reduction is reversed in the coming years. The CMI model is driven by assumptions, one of which is the single long-term improvement rate, and we would consider it unlikely to be appropriate to make any changes to this assumption until it is clearer that recent experience is indicative of being a trend over the longer term.”
The Regulator’s Scheme Funding Statistics 2015 show that over 90% of schemes do use the CMI mortality projections in their funding valuations and adopting the latest projections would improve the funding position of these schemes. This guidance is therefore directly relevant to the vast majority of trustees setting assumptions for Technical Provisions and the sponsoring employers paying to meet the deficits. When deficits are often growing despite substantial contributions, this is by no means an academic issue and could make a huge difference to struggling companies.
Obviously the Regulator is absolutely right to say that it is reasonable for trustees to use the latest projections available in assessing their funding needs. I’d go even further personally and suggest that the primary reason against doing so would be to arbitrarily keep the Technical Provisions (slightly) higher, which seems overly conservative to me. My preference would always be to use the latest data available to get the most up to date understanding of the position.
Equally, the Regulator is eminently sensible in highlighting the need for trustees to consider what might happen if their assumptions are not borne out in practice. There is definitely some concern that the latest mortality statistics might just be a blip and so trustees will need to bear that risk in mind when setting assumptions.
That said, the improvement in crude mortality rates seen in 2012 to 2015 has been the lowest for any four year period since The Wurzels were at number one in the charts with “Combine Harvester” and only one of these last four years (2014) saw any noticeable improvement in mortality whatsoever. I believe this may well be the start of a trend for longevity to improve at a lower rate than we’ve seen recently and that schemes may be putting aside more money than is really needed if this proves to be the case. So trustees (and employers) will also want to consider the possibility that current assumptions are still too cautious as well as the risk that they aren’t conservative enough. It cuts both ways.
I’m also painfully aware as a Scheme Actuary that for many years I underestimated the rate of improvement in longevity – though to be fair that certainly wasn’t just me! Our understanding and modelling of mortality has improved dramatically but I wonder whether even actuaries can be affected by the understandable human reaction to overcorrect when we’ve done something wrong. Is it possible that we’ve been so scarred by underestimating longevity for so long that we’re terrified to do the same thing again?
Given this uncertainty, my recommended approach would be to use the latest statistics and projections to give the best possible estimate as a starting point. Schemes should then consider how much prudence they need to add in to cover contingencies, including the very real risk that I’m completely wrong and normal service on mortality improvements will be resumed shortly.