The length of time a pension may be paid for is clearly a vital component in valuing pension scheme liabilities and therefore will have an impact on the cost of providing for those liabilities. Employers need to be informed about their options and if they should be discussing alternative assumptions with the scheme trustees.
For company accounting purposes the employer is required to use ‘best estimate’ mortality assumptions and yet frequently use the same or similar mortality assumptions which tend to reflect the ‘prudent’ basis required for scheme funding purposes even though these may increase the liabilities being disclosed.
Mortality assumptions should be expressed as:-
1. An appropriate assumption now.
We frequently see scheme trustees employ inappropriate assumptions such as using statistics based on insurance company pensioners who tend to have much better longevity than members of occupational pension schemes or failing to adjust for the socio-economic mix of the workforce (which is much more important than any regional factors).
2. An allowance for future improvements.
The rate of improvement of mortality rates in future is of course a great unknown and an extremely subjective assumption and there are a variety of approaches that can be adopted and employers may not wish to blindly follow the assumptions put forward by the trustees.
Many of our clients are now looking to adopt an approach to mortality estimation which much more closely reflects the profile of their specific scheme membership.
The advice provided by our pensions experts equips employers with invaluable insight into the options available and the actions being proposed by the trustees. Speak to Alan Collins for more information.