Pensions Conference 2011. Review of Workshop D1: A framework for the use of discount rates in actuarial work

Will we change the way we set discount rates?

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Charles Cowling presented the progress to date on a project to harmonise the way in which actuaries across the whole profession set discount rates. The end-goal is to produce a transparent, common framework for setting discount rates.

Two approaches are being proposed which should be used for different purposes:-

“Matching” – a discount rate which is based on the market return available on assets which most closely match the characteristics of the liabilities. Appropriate for use in transactions where one stream of cashflows is being exchanged for another or tests of adequacy of assets to cover market value of liabilities (eg, solvency).

“Budgeting” – a discount rate which is based on the expected returns of assets held to back the liabilities. Appropriate for use in planning exercises, where transactions or market comparisons are not required or anticipated (eg, technical provisions and recovery plans).

Under both approaches there is scope to apply margins. However, the margin will now be applied explicitly and transparently, within a consistent framework for setting the underlying rate.

There was significant resistance from the Profession’s Management Board (and those present at the session) for adopting a matching approach for transfer values.

Generic proposals have been made to the Management Board which were generally well received. Pensions-specific recommendations generally received a mixed reaction. The Management Board is considering the next steps.