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

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

2. Overview • Impact of Market Movements • Mortality • De-Risking • The Board for Actuarial Standards (BAS)

3. Impact of Market Movements

4. Assets

5. 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

6. 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

7. S179 – PPF Levy

8. Mortality • Baseline mortality table • Projections for future mortality improvement • Minimum annual rate for future improvements

9. 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

10. Projections for Future Improvements • Cohort projections becoming outdated • New projection model from CMI • Key assumption: current rates of change in mortality will blend over time into a long-term rate • 2 levels of complexity •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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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