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Mortality assumptions

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Key points

  • This guidance is aimed at trustees and advisers involved in choosing mortality assumptions for an actuarial valuation. It is also relevant to employers considering agreeing to such assumptions.
  • Good practice requires assumptions to be evidence based and to be clearly and transparently described.
  • Trustees should adopt a terminology consistent with that put forward by the Continuous Mortality Investigation of the actuarial profession to aid transparency and understanding.
  • Trustees should note that there have been significant recent developments in our knowledge of current trends in mortality, with some projections which have been in common use no longer likely to be considered reasonable assumptions.
  • There are two separate decisions for trustees on mortality assumptions:
    • the baseline table for the current rates of mortality; and
    • the allowance for future improvements.
  • Whilst the baseline assumption may be scheme specific, individual schemes will not normally have the evidence to make a scheme specific allowance for future improvements and will need to base their choice on broader data.
  • We consider that an adjustment made to the discount rate as a proxy for future improvements in mortality does not meet the statutory requirement to adopt a prudent mortality assumption, or achieve good practice in clarity.
  • We take the view that prudence:
    • with regard to the base mortality as at the valuation date, means taking a margin below best estimate rates where those best estimates are obtained from one or more of:
      • scheme experience (where statistically justifiable);
      • standard tables derived from aggregated relevant experience; and
      • adjustments derived from scheme characteristics known from aggregated analysis to be relevant to observed mortality;
    • with regard to future mortality improvement rates, means not assuming any rates lower than are reasonable based on the most up-to-date evidence and currently accepted projection methodologies.


  1. The scheme funding requirements of the Pensions Act 2004 centre on the value to be placed on a scheme's accrued liabilities, known as 'technical provisions'. As with any actuarial calculation, technical provisions require assumptions to be made about the future course of all those factors affecting the cost of providing the benefits. These assumptions must be chosen prudently. Trustees must obtain actuarial advice before choosing assumptions and, subject to certain exceptions governed by the scheme rules they must obtain the agreement of the employer. Key assumptions will include inflation, investment return and how long scheme beneficiaries are expected to live (longevity). A mortality rate refers to the assumed probability of dying within a year whereas longevity usually refers to the future expected lifetime derived from any particular set of mortality rates.
  2. We issued 'Code of practice 03: Funding defined benefits' ('the Code'), providing practical guidelines and setting out expected standards of conduct and practice for those who must meet the legislative requirements under part 3 of the Pensions Act 2004.
  3. We now have experience, from recovery plans submitted, of how trustees have interpreted the funding requirements of the legislation and the Code. In September 2007 we published 'Recovery plans: an initial analysis'. There have also been significant new developments in the field of mortality relevant to pension scheme funding, particularly those highlighted by the Continuous Mortality Investigation of the actuarial profession (CMI).
  4. Accordingly, we believe it opportune and helpful to issue some additional guidance on choosing mortality assumptions. The general principles, including those relating to prudence, are of application when considering the adoption of any assumption, though this guidance focuses on mortality.
  5. We expect trustees to follow a robust process for choosing assumptions, which would typically include the following elements. These elements are also relevant to trustee discussions about funding decisions more generally:
    • the trustees involved (who might perhaps be members of a sub-committee selected for the purpose) should have familiarised themselves with the main issues;
    • the trustees should identify, in discussion with the actuary, those aspects about which decisions need to be made;
    • they must obtain advice from the actuary about the aspects identified; and
    • they should have documented their reasons for the decisions made.
  6. We acknowledge that different processes and decisions are likely to be appropriate for small schemes and these are commented on further in the relevant sections below. A particular issue for small schemes is that quite often significant liabilities are concentrated in relatively few members and hence inherent variability of individual outcomes is not reduced to the extent it usually is in larger schemes.
  7. Whilst the guidance is directed to trustees in view of their statutory responsibility to set assumptions, we understand that much of the material in this guidance will be unfamiliar to many trustees and is necessarily quite technical in places. Trustees should seek input from the scheme actuary to help their understanding. We will review this guidance as necessary and in the light of developments in the market, and will continue to work with all the relevant authorities such as the Board for Actuarial Standards (BAS), the actuarial profession and the CMI.

General principles for choosing assumptions

  1. All assumptions must be chosen prudently.  We interpret prudence as taking a margin on the cautious side of a best estimate (or expected value) (Code, para 85). However, whilst each assumption must be chosen prudently, we take the view that an appropriate overall level of prudence in the technical provisions should be the paramount objective. Consequently we accept that the degree of prudence adopted could differ between assumptions in order to achieve a target level of prudence in the technical provisions as a whole. Indeed, in the extreme, for some less key assumptions it might be appropriate to assume best estimate, as long as overall technical provisions are adequately prudent (Code, para 84).
  2. It is essential for trustees to discuss with the scheme actuary how sensitive the technical provisions are to changes in the value of each assumption (Code, para 79).  The more sensitive the technical provisions are to variations from the best estimate value of an assumption, the more important it is to choose an appropriately prudent value for it. This does not mean that detailed calculations are needed in each case, rather that the actuary can identify from their own experience and general reasoning those assumptions to which the valuation will be most sensitive. However, the trustees should themselves understand which these key assumptions are.
  3. Trustees should ask the scheme actuary to advise them on whether any concentration of liability poses a significant mortality risk for the scheme, taking into account the size of the scheme's membership. In schemes with a small membership, random fluctuation in mortality could be significant and hence any margin for prudence may need to be relatively greater than for a large scheme.
  4. Evidence should form the basis of justification for all assumptions. Such evidence will usually involve considering past experience, current conditions and expected future trends. It is important to relate more general data, such as occupational or geographic groupings, to the situation of the particular scheme. This will be especially relevant to the choice of demographic assumptions (such as mortality and early leaver rates) where there is wide variation of observed rates within the population or between employers (Code, para 79). Arriving at scheme specific mortality assumptions can be by any one of:
    • solely own experience (only likely to be appropriate in the case of the very largest schemes);
    • own experience used to adjust a standard table (likely to be a common approach for medium to large schemes); or
    • an understanding of scheme characteristics applied to wider research (likely to be appropriate to smaller schemes where own experience is not statistically reliable).
  5. An analysis of a scheme's own mortality experience will usually provide relevant evidence. However, with a small membership, random fluctuations could make this unreliable as a sample from which to draw inferences about the future. Trustees need to discuss with their actuary the statistical reliability of their own scheme's experience. In the case of small schemes, it may not be worthwhile to undertake this analysis, instead relying on more general factors such as industry, occupation or pension size, to adjust a standard table.
  6. Although trustees are the decision makers when it comes to funding assumptions, they must take advice from the scheme actuary who will be able to advise them on best estimates and on appropriate margins for prudence (Code, paras 39-41). This may be by way of stochastic modelling (stochastic modelling is based on many simulations of the future, generated by a computer using a mathematical model with random elements) to illustrate the variability of outcomes and their relative likelihood. From such output, trustees will be able to select appropriately prudent assumptions consistent with the confidence they wish to have that the technical provisions will prove adequate to provide the promised benefits (Code, paras 88-91). Where stochastic modelling is regarded as inappropriate, perhaps because of the expense for a small scheme, other methods such as scenario illustrations should be used.
  7. Trustees should note that actuaries are required by their professional code to adhere to any relevant technical standards set by BAS.
  8. It is the responsibility of trustees to understand the funding assumptions they have adopted and the reasons for their choice. Trustees can expect the scheme actuary to provide sufficient information and explanation for this to be the case.

Mortality assumptions and the role of trustees

  1. The code encourages trustees to pay particular attention to assumptions about future mortality (Code, paras 80-81). Trustees should bear in mind that mortality has the following features:
    • wide variability is observed between individuals;
    • there is variability year-on-year in the whole population;
    • long-term trends can be observed in age specific mortality of whole populations; and
    • historically, experts have usually underestimated the rate at which mortality will reduce (longevity increase).
  2. Evidence has shown for many years that mortality is steadily reducing, so that the expectation of life (longevity) is increasing. Detailed analysis of this increase shows that it has occurred at different rates in different generations (the 'cohort effect'). Evidence also shows that there is significant variation in pensioner mortality by amount of pension.
  3. There is evidence to suggest that socio-economic circumstances and lifestyle choices such as smoking, drinking and exercise habits have an impact on mortality. However, it is not likely that these factors can be assessed directly by trustees of a pension scheme; instead proxies for these are often used, such as postcodes and pension size.

What trustees need to consider with the scheme actuary

  1. There are two basic decisions trustees need to take on mortality assumptions:
    • the base table (including any adjustment) to reflect the scheme's current mortality experience; and
    • the allowance for future improvement.

    Other decisions that need to be made are:

    • how to update the base table from its base date (publication or data collection, as relevant) to the effective date of the valuation, by a linking improvement assumption. This linking assumption will often be the same projection as the allowance for future improvement, but need not necessarily be so; and
    • what assumptions to make in respect of members who retired (or will retire) early on ill health grounds.
  2. Trustees can expect the scheme actuary to analyse the experience of their scheme and advise them of the results and their statistical significance. The extent of the analysis that can be meaningfully carried out will depend on the size of the scheme membership.
  3. Where a scheme has a sufficiently large membership for the analysis of the scheme's own mortality experience to be statistically significant, attention should focus on how well the proposed table fits the experience of the scheme. It may even be possible to create a bespoke table from the scheme's own experience. Trustees should discuss with the scheme actuary an appropriate margin for prudence in these base table rates.
  4. Actuaries commonly recommend adjusting a standard table in order to reflect better the evidence of the current experience of a particular scheme (or expected future experience). These adjustments can be by various methods, such as:
    • an age rating (treating members as younger or older than they actually are). This would be appropriate where scheme experience or general factors, such as industry or type of work, suggest that mortality is lighter or heavier than a standard table. This approach could be used (by assuming a lower age), to add a margin for prudence and is straightforward to use in practice;
    • assuming that mortality is a percentage heavier (eg 120%) or lighter (eg 80%) of the rates from a standard table. This may be applied for similar reasons to those given above and could be sophisticated (if justified by statistically reliable evidence) by applying different percentage rates at different ages (although computer systems need to be able to cope); or
    • a blend of two standard tables, perhaps to achieve a 'shape' more aligned to scheme experience.
  5. Where a scheme does not have a sufficiently large membership for the analysis of the scheme's own mortality experience to be statistically reliable, the choice of appropriate table(s), including any adjustments (see below), will need to be guided by consideration of factors known to be correlated with observed mortality. Many of the factors known to have the most direct influence on mortality (such as socio-economic group and life style choices) will not usually be readily available so that proxies will be needed. These commonly include:
    • the level of pension;
    • pay level;
    • the industry of the employer;
    • the occupation of the member; and
    • the residential location of the member.
  6. Care should be exercised, however, not to double count the same effect. For example, if an industry is predominantly low-paid it would be wrong to apply both the average industry and size of pension effects when selecting and/or adjusting a table. Two or more factors might be taken into account as long as trustees understand their interactions and allow for them.
  7. Trustees should discuss with the scheme actuary:
    • how the proposed mortality assumptions are justified by the evidence available; and
    • an appropriate margin for prudence.
  8. Having decided on appropriately prudent base tables, the trustees also need to decide how to allow for future improvements. This is an obvious area of great uncertainty. There is a variety of approaches to improvements and discussion is likely to centre on an approach from the CMI library of improvement rates. Trustees need to discuss with their actuary:
    • relevant recently published data, such as:
      • new CMI tables, whether based on relevant insurance company experience or self administered pension scheme (SAPS) experience;
      • new UK, or constituent country, population data or tables; and
      • relevant published projection methodologies, including new additions to the CMI library;
    • whether to assume that improvement rates will trend towards certain values in the long term (sometimes referred to as minimum values or underpins) and, if so, what they should be bearing in mind that they could be age dependent;
    • the 'cohort effect' and how to allow for it; and
    • the general characteristics of the various approaches available for projecting mortality including in particular those within the CMI library, in terms of how they deal with long-term trends, the cohort effect, the weight given to recent trends, etc.

Illustrating and presenting the impact of mortality choices

  1. Trustees should ask the scheme actuary to illustrate the effects of different mortality assumption choices in ways that the trustees can understand and which allow them to appreciate the financial effect on the technical provisions. These illustrations may take a variety of forms, such as:
    • mortality rates at certain sample ages;
    • risk sensitivity by showing the effect of a 10% reduction in all mortality rates;
    • life expectancy at certain sample ages;
    • showing both period and cohort expectations of life (to illustrate the effect of improvement rates);
    • annuity factors at certain sample ages on period and cohort mortality rates;
    • technical provisions at certain sample ages on period and cohort mortality rates;
    • showing the discount rate shift which is equivalent to the mortality improvements adopted;
    • for large schemes, showing fan charts of future funding levels based on initial funding, future contributions, investment strategy and mortality derived from stochastic modelling; and
    • small schemes might wish to illustrate concentration risk by, for example, scenario illustration (eg by supposing those with the highest liability survive 5 (say) years longer than assumed.)
  2. We expect all the mortality assumptions to be clearly set out in the trustees' statement of funding principles as to enable a reader to accurately reproduce the relevant mortality rates for valuation purposes.

Offsetting adjustments in other assumptions

  1. We consider that an adjustment made to the discount rate (investment return assumption) to make allowance for future improvements in mortality, does not meet the statutory requirement to adopt a prudent mortality assumption. Additionally, as a matter of good practice, an adjustment to one factor to allow for prudence in another factor lacks clarity and risks clouding understanding.
  2. However, as noted above, illustrating the interest rate deduction which is equivalent in its effect to the improvement factors adopted could be useful.

Disclosure matters and terminology

  1. We encourage trustees to describe mortality assumptions in their statement of funding principles using terminology which is consistent with that proposed by the CMI.
  2. In communications to members, trustees should use their judgement to describe mortality assumptions in a manner likely to be accessible but not misleading. Trustees should discuss proposed descriptions with their actuary.

Sources of information

  1. There are several websites where research on mortality is published. Some are designed for the general public to access – such as that of the Office for National Statistics, whilst others are aimed at mortality specialists, demographers and actuaries – such as that of the CMI.
  2. Readers should bear in mind that all the research published may be controversial and not necessarily be generally accepted. The date of publication is very relevant as the research may well have been updated later and published elsewhere.
  3. We show below some relevant websites. These are far from being an exhaustive list. We also list some publications which had been first published shortly before this guidance (in September 2008), with a very brief description of their content.
    • The Pensions Regulator
      • Good practice when choosing assumptions for defined benefit pension schemes with a special focus on mortality – Consultation document, February 2008, pages 14-22, Annex: Detailed background on evidence and developments in mortality.

        This annex provides background and discussion, and summarises the development of the evidence over recent years until February 2008.

    • The Board for Actuarial Standards 
      • Actuarial Mortality Assumptions: Discussion Paper, March 2008.
        This paper serves two purposes: first to explain the complex issues involved, and second to discuss the part that technical actuarial standards might play in the overall regulatory framework.
      • Report of the Mortality Research Working Group.
        This is a technical research report which considers how actuaries can draw on information and techniques from a number of different research areas when setting mortality assumptions.
      • Mortality Today.
        This is a non-technical background article.
    • The Continuous Mortality Investigation
    • The Office for National Statistics

Legislative references

Para 1

chosen prudently: Regulation 5(4)(a) - (c) The Occupational Pension Schemes (Scheme Funding) Regulations 2005 SI 2005 No 3377

actuarial advice: Pensions Act 2004 section 230(1)(a)

certain exceptions governed by the scheme rules: Paragraph 9 of Schedule 2 to The Occupational Pension Schemes (Scheme Funding) Regulations 2005 SI 2005 No 3377

agreement of the employer: Pensions Act 2004 section 229(1)(a)

Para 3

recovery plans submitted: In accordance with s226(6) Pensions Act 2004

CMI: CMI Working Paper 30 and the CMI Library of Mortality Projections and
CMI Working Paper 29 – An analysis of the results of the mortality of male and female pensioners of self-administered pension schemes for the period 2000 to 2004 based on data collected by 30 June 2006.

Para 5

obtain advice from the actuary about the aspects identified: Pensions Act 2004 section 230(1)(a)

Para 8

chosen prudently: Regulation 5(4)(a) - (c) The Occupational Pension Schemes (Scheme Funding) Regulations 2005 SI 2005 No. 3377

Para 13

appropriate margins for prudence: Pensions Act 2004 s230 (1) (a)

Para 17

the cohort effect: CMI Working Paper 30 and the CMI Library of Mortality Projections

significant variation in pensioner mortality by amount of pension: CMI Working Paper 29 – An analysis of the results of the mortality of male and female pensioners of self-administered pension schemes for the period 2000 to 2004 based on data collected by 30 June 2006

Para 29

statutory requirement to adopt a prudent mortality assumption: Regulation 5(4)(c) The Occupational Pension Schemes (Scheme Funding) Regulations 2005 SI 2005 No 3377

Para 31

CMI: CMI Library of Mortality Projections – November 2007