AEGONFaculty of Actuaries Students’ Society

Current Topics 2010 - Pensions

Sally SmithApril 2010

2

Overview

Impact of Market Movements

Mortality

De-Risking

The Board for Actuarial Standards (BAS)

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Impact of Market Movements

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1

2

3

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Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

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Jun-

09

Jul-0

9

Aug

-09

Sep

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Oct

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Nov

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Dec

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%

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500

1000

1500

2000

2500

3000

3500

4000

15 yr gilt yield AA Bond Inflation All Share - total return

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Assets

Average UK DB Scheme Asset allocation

21%

26%

11%

14%

12%

5%

11%

UK Equities

Overseas Equities

Fixed Interest Gilts

Bonds

Index-Linked

Property

Other

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Accounting

Increasing net discount rate in 2008

Reduction to reported pension scheme liabilities

Falling net discount rate in 2009

Many schemes have had to report significantly worse funding positions

Proposed move to risk free discount rate

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Funding

End of March particularly bad time for funding

Total funding basis deficit of £329 billion at 31 March 2009, compared to £98 billion at 31 March 2008

DC schemes also hit hard by recession

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S179 – PPF Levy

Aggregate s179 surplus/deficit

-300

-250

-200

-150

-100

-50

0

50

100

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

£b

n

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Mortality

Baseline mortality table

Projections for future mortality improvement

Minimum annual rate for future improvements

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Baseline Mortality – 00 Tables v. SAPS

SAPS more appropriate for pension schemes?

SAPS expected to reduce liability values

Both tables may need adjusting to reflect occupation, geographic location and pension size

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Projections for Future Improvements

Cohort projections becoming outdated

New projection model from CMI

Key assumption: current rates of change in mortality will blend over time into a long-term rate

2 levels of complexity

Final model issued in November 2009

Mortality data will be updated on a regular basis

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Minimum Rate for Future Improvements

Cohort adjustments assume mortality improvements slow down in the future

Include a minimum improvement rate to mortality projection

Allow for future improvements implicitly in the discount rate

TPR will scrutinise assumptions that do not have some sort of underpin

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De-Risking

Closure to new entrants

Ceasing future accrual

Changes to ongoing benefit design

Liability Driven Investment strategies

Enhanced Transfer Values

Buyouts / Buy-ins

Longevity Hedging

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Enhanced Transfer Values

Uplifted TV or Standard TV plus cash payment

Employer can reduce long term costs and associated risks, but requires initial cash outlay

Trustees can secure member benefits and reduce risk in the scheme – but they must act in the best interests of all members

TPR concerned about high pressure tactics

Communication and independent financial advice essential

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Buyouts / Buy-ins 1

2006 – 2008

New providers enter the market

Increased competition and reduced prices as providers strive to build up market share

Coincides with improved scheme funding levels making buyout / buy-in more attractive, particularly for pensioners

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Buyouts / Buy-ins 2

2009

Economic downturn – scheme sponsors have less capital resources

Increased annuity prices – buyout / buy-in less affordable

Greater divergence in prices across providers

Solvency II

Rise in longevity swap market

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Longevity Hedging 1

2009 saw longevity swap market take off in the UK

6 deals totalling £4.1bn

Current market focused on large schemes and pensioners

Key advantage – no initial cash outlay required

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Longevity Hedging 2

Longevity swap effectively swaps actual mortality experience for an assumed mortality rate

Longevity swap cashflows

Pensioner

Pension Scheme

Hedge Provider1

3

2

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Longevity Hedging 3

Advantages:

No initial cash outlay

DIY buy-in may be cheaper than the traditional buy-in

Pricing is attractive at present

Disadvantages:

Advice, documentation and processes are complex and time consuming

No current offering for deferred liabilities

Focus on larger schemes

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The Board for Actuarial Standards (BAS)

Generic TASs

– TAS R – applies from 1 April 2010

– TAS D – applies from 1 July 2010

– TAS M – expected to apply from 1 January 2011

Specific TASs