Pensions review: Rates of return and demographic assumptions

Appendix L of the SIB (now FSA) Specification of Standards and Procedures, published in October 1994, set out the original rates of return for calculating prospective loss and redress, which applied for the period 1 October 1994 to 31 January 1995. Appendix G set out the rates to be applied when calculating actual loss.

A revised Appendix L and a note of changes to be made to Appendix G were last published by the FSA on 1 May 1999 with effect from that date. Details of adjustments to both Appendix L and Appendix G, taking effect from 1 August 1999, are set out in the attached revised Appendices L and G.

The original mortality decrements were specified in the October 1994 guidance in Appendices C, D and E. They have remained unchanged since then. The FSA has received advice from its independent actuarial advisers that the original mortality decrements would not be appropriate for phase 2 of the Pensions Review. The FSA has therefore decided on the basis of actuarial advice to amend the guidance so that loss and redress calculations should assume mortality in line with the standard mortality table PA(90) rated down 3 years.

Notes for editors

The FSA announced details of its guidance, designed to establish a framework for reviewing past transfers and opt outs, on 25 October 1994. This had as its purpose the provision of redress to people missold personal pensions.

One element of the guidance involved periodic review, at three month intervals, of the specified rates of investment return. These rates of return together with other factors determine how much it costs firms to provide redress by top-up of the personal pension in cases where reinstatement (the preferred form of redress) is not available.

At the nineteenth review, actuarial advice received by the FSA indicates that, on the basis of current investment conditions, the specified rates should be increased at certain durations to retirement from those applied in the previous quarter. For durations to retirement where no increase in specified, the rate remain as for the previous quarter.

The loss assessment and redress calculation makes various assumptions about likely demographic developments in the future. Predicted improvements in the life expectancy of the phase 2 pensions review population have been reflected by adjusting the demographic assumptions prescribed for the calculation.

Copies of the Pension Transfers and Opt Outs: Review of Past Business; Part II: Specification of Standards and Procedures are available from FSA Publications, price 25.00.

Copies of the Appendix L assumptions, applying for periods prior to the current quarter are also available on request.

Information concerning the recent fine-tuning review of the assumptions for loss assessment and redress calculations is given in FSA Pension Review Bulletin Number 5 (dated August 1999).

The FSA was formerly known as The Securities and Investments Board.