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

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

3. 3 Impact of Market Movements

4. 4 Assets

5. 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. 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. 7 S179 – PPF Levy

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

9. 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10. 10 Projections for Future Improvements  Cohort projections becoming outdated  New projection model from CMI  Key assumption: current rates of change in mortality will blend over time into a long-term rate  2 levels of complexity 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. 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. 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. 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. 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. 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. 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. 17 Longevity Hedging 2  Longevity swap effectively swaps actual mortality experience for an assumed mortality rate Longevity swap cashflows Pensioner Pension Scheme Hedge Provider 1 3 2

18. 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. 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