31 May 2012

FRC: Actuarial assumptions used in pension scheme projections

The FRC and FSA published a joint consultation paper which sets out proposals to change the assumptions used in projections of the returns from financial products, including pensions.

The FSA consultation covers:

• proposals for updating the mortality assumption to be used when illustrating a personal pension, including implementation of the European Court of Justice (ECJ) ruling on gender equality in insurance;
• introduction of a separate Consumer Prices Index (CPI) assumption for transfer value analysis (TVA) when benefits under a defined benefit (DB) pension scheme are compared with the possible benefits under a personal pension scheme; and
• changes to the investment return assumptions (projection rates) in Chapter 13 Annex 2 of the Conduct of Business sourcebook (COBS).

The FRC consultation covers:

• possible changes to the assumptions used for Statutory Money Purchase Illustrations (SMPIs) to make them consistent with the FSA assumptions in COBS (amended as proposed in Chapter 4).

The FSA is proposing to reduce the intermediate projection rate for tax advantaged retail investment products such as personal pensions from 7 per cent to 5 per cent. It is seeking views on whether the maximum projection rate used in Statutory Money Purchase Illustrations (SMPIs) should also be reduced from 7 per cent pa to 5 per cent pa, or whether the maximum rate should be removed.

All the chapters will interest life insurers and other providers of personal pensions and also firms that advise on personal pensions. Chapter 3, on the introduction of explicit CPI-linked assumptions, will also interest TVA software providers and employee benefit consultancies as well as employer sponsors of DB schemes. Chapter 4, on changes to the projection rates in COBS 13 Annex 2, affects all non-MiFID packaged products, not just pensions, so will interest providers of these products and firms that advise on them, including firms advising on TVA. Chapter 5 will also be of interest to administrators and trustees of occupational pension schemes and firms that advise on occupational pensions.

Press release

Consultation Paper

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