Actuarial valuations have become rather dull. Not only have most schemes now met their Technical Provisions, but many are also fully funded on a self-sufficiency basis or even on a buy-out basis.
And whilst there are new rules, they have been a very long-time coming, so were well trailed and are ultimately not that different to the old regime, which had been in place for almost 20 years.
Moreover, the dramatic change in market conditions in the lead up to and particularly following the ‘gilts crisis’ has reduced the importance attaching to some of the actuarial assumptions being made.
In the higher interest rate environment that we currently find ourselves in, valuations discount future benefit obligations with reference to those higher rates of interest. This dramatically reduces the assessed cost of providing future pension payments. However, it has a far greater impact on the value placed on payments further into the future than it does on those that are due in the near term.
For a typical scheme, payments due in the next 10 years could now account for around 50% of its liabilities. Just a few years ago, when real yields were negative, more than two-thirds of the liability of a typical scheme related to benefits payable more than 10 years hence. As a result, some actuarial assumptions have become significantly less material to the valuation than they used to be.
For example, in setting the mortality assumption, the importance of the long-term rate of improvement has been dampened down considerably.
When yields hit record lows in December 2021, using a long-term rate of 1.5% as opposed to 1% would have increased the value placed on an inflation linked pension payable from age 65 by nearly 2.5%. Under current market conditions, the impact would be less than 1%.
This may mean agonising over mortality assumptions and whether they are sufficiently prudent could be consigned to history, as long as interest rates don’t revert to the lows of the previous decade or so!
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