Mortality Assumptions Used in the Calculation of Company Pension Liabilities in the EU

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Mortality Assumptions Used in the Calculation of
Company Pension Liabilities in the EU
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Introduction

• David Collinson
• UK Actuarial Profession

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Acknowledgements

• This research has been sponsored by
• The UK Actuarial Profession
• Watson Wyatt
• Aon
• Hewitt Associates
• Mercers
• Towers Perrin
• Cass Business School

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Background

• FRS17/IAS 19 has focused attention on the
  calculation of companies pension liabilities and
  also highlighted their significance in the
  balance sheet
• Attention has been paid to key economic
  assumptions such as the discount rate and assumed
  inflation, both in terms of absolute level and
  consistency between countries
• The Mortality assumption, although material, has
  not been hitherto subject to the same level of
  scrutiny. In particular the extent to which the
  assumptions used are consistent between countries
• In many cases Standard tables have been used,
  which it was felt reflected very different
  approaches to both level of mortality and
  allowance for future trends

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Objectives of the Study

• Focus on assumptions used to measure liabilities
  for current pensioners
• Collect information on the mortality tables most
  commonly used for valuing occupational pension
  liabilities
• Compare the tables used both against population
  mortality in each country and between countries
• Identify the extent to which future improvements
  in mortality are being considered/allowed for
• Identify whether any conclusions could be drawn
  with a particular focus on the issues raised for
  a multinational corporation with significant
  pension liabilities in the countries considered
• Focus on the EU countries, but also include US
  and Canada

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Comparison of Mortality Assumptions

• Prof Richard Verrall, Prof Steven Haberman, Dr
  Terry Sithole
• Cass Business School

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What does this mean for multi-national employers?

• Timothy Reay
• UK Actuarial Profession

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The accounts of a multinational employer

• Must comply with international accounting
  standards
• Must be signed off by an auditor
• Accounts must present a true and fair view to
  investors and other stakeholders

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Defined benefit pensions a significant issue

• Many UK companies UK pension schemes are larger
  than companies themselves
• UBS study Combined actuarial deficit in FTSE
  100 companies pension schemes is over 40
  billion
• Issue is not the size of this deficit (or
  surplus), but how it is measured
• Example UK pension scheme, assets 800m,
  liabilities 1000m

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The mortality assumptionThe last great
uncertainty

• Close scrutiny and disclosure of discount rates
  and other financial assumptions
• Discount rates measured to nearer 0.25 (or 0.1)
• Change in mortality table potentially more
  significant than such a change in discount rate

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What does this mean for multinational employers?

• Mortality does vary from country to country
• Underlying population mortality varies
• Pension scheme members may be a different subset
  of the population in different countries
• but not as much as the assumptions would
  suggest
• So are the figures really comparable?

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What does this mean for multinational employers?

• Increased attention from auditors
• Disclosure to investors and other stakeholders
• Notes to accounts
• Discount rate single figure
• Inflation single figure
• Return on assets single figure
• Mortality ?

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Conclusions and suggestions for the future

• Prof Richard Verrall
• Cass Business School

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Conclusions

• Practice varies quite widely across the EU
• Different approaches taken to projection
• The effect on stated liabilities can be
  significant

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Recommendations

• The mortality assumptions be included in the
  disclosure of pension expense in company accounts
  in as clear and informative a way as possible.
• Projected mortality tables allowing for future
  improvements of mortality rates be used in
  calculating pension liabilities for companies in
  all countries as far as possible
• Consideration should be given to the inclusion of
  a single figure to reflect the strength of the
  mortality assumptions used. We recommend the
  Cass Index of Mortality to keep the disclosure
  as simple as possible while remaining
  sufficiently informative for analysts and
  auditors to be able to have confidence in the
  results.

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Cass Index of Mortality
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