Aegon faculty of actuaries students society current topics 2010 pensions sally smith april 2010
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AEGON Faculty of Actuaries Students’ Society Current Topics 2010 - Pensions Sally Smith April 2010. Overview. Impact of Market Movements Mortality De-Risking The Board for Actuarial Standards (BAS). Impact of Market Movements. Assets. Accounting. Increasing net discount rate in 2008

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AEGON Faculty of Actuaries Students’ Society Current Topics 2010 - Pensions Sally Smith

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Aegon faculty of actuaries students society current topics 2010 pensions sally smith april 2010

AEGON

Faculty of Actuaries Students’ Society

Current Topics 2010 - Pensions

Sally Smith

April 2010


Overview

Overview

  • Impact of Market Movements

  • Mortality

  • De-Risking

  • The Board for Actuarial Standards (BAS)


Impact of market movements

Impact of Market Movements


Assets

Assets


Accounting

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


Funding

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


S179 ppf levy

S179 – PPF Levy


Mortality

Mortality

  • Baseline mortality table

  • Projections for future mortality improvement

  • Minimum annual rate for future improvements


Baseline mortality 00 tables v saps

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


Projections for future improvements

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  • Cohort projections becoming outdated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


Minimum rate for future improvements

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


De risking

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


Enhanced transfer values

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


Buyouts buy ins 1

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


Buyouts buy ins 2

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


Longevity hedging 1

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


Longevity hedging 2

Longevity Hedging 2

Pension Scheme

3

1

Hedge Provider

Pensioner

2

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

    Longevity swap cashflows


Longevity hedging 3

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


The board for actuarial standards bas

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


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