Discount rates project
The Management Board of the Institute and Faculty of Actuaries has undertaken a thought leadership cross-practice research project on discount rates. Part of that project has been the commissioning of objective research on current practice in this area. The timing for this research is particularly appropriate as there is a convergence of interest in discount rates from within and outside of the profession.
Discount rates are the heart of most actuarial calculations and therefore are also of significant public interest. In order to be able to continue to speak clearly and with authority in future debates about discount rates, the Profession needs to have a clear and common understanding of the issues surrounding the different discount rates used today across practice areas and to help in the development of frameworks for the future that will support actuaries in communicating impartially and effectively.
The Management Board has set up a small cross-practice steering committee chaired by Charles Cowling to drive the project. The Discount Rate Steering Committee identified five packets of research that needed to be undertaken to achieve the projects overall objectives:
- A survey of current practices
- A survey of existing research and debate
- Developing a common language for communicating discount rates and risk
- Developing a common framework for the future where appropriate
- Considering the impact of any changes
A call for research to undertake the first three packets went out in early December with a closing date for proposals in early January. The successful proposal was led by Chinu Patel and Chris Daykin with a team of more junior researchers associated with Cass Business School, Imperial College and Dublin City University. Chris was, until September 2007, the UK Government Actuary and Chinu was a partner/senior consultant in a leading global pension consultancy. Both are now sole practitioners.
The preliminary output was presented at a forum of thought leaders across the Profession and externally on 23 March 2010. The final version of the report by Chinu and Chris, Actuaries and discount rates, was presented to the Discount Rate Steering Committee in May 2010. It covers their initial research into past and current practice in the setting of discount rates in the UK, and a survey of existing research and debate. The report covers some initial steps towards developing a common language whilst acknowledging further work is needed on the most appropriate classification and ways of describing the concepts involved. The report was gratefully received by the Discount Rate Steering Committee.
The work of the Steering Committee
A Framework for the use of Discount Rates in Actuarial Work, November 2012
The Committee was set the task of creating a framework by which actuaries, in whatever area of work, might better understand why they use a particular approach to setting a discount rate. This would then allow the creation of a structure by which actuaries might better explain to their clients what they have done. The Committee has therefore produced A Framework for the use of Discount Rates in Actuarial Work, a shortened summary of its work which is intended as a contribution to the debate and to promote thought leadership in this area. The framework described in this note does not represent a unique approach to considering discount rates but the Institute and Faculty of Actuaries believes that widespread understanding of the framework would prove helpful, both for actuaries and for users of actuarial advice.
Final reports from the Discount Rates Steering Committee, September 2011
The Committee has published its final recommendations and the way forward together with a final update on the project including feedback from the consultation process.
The Profession has also published a Press Release.
Discount Rates Sessional Research Meetings, January 2011
The events in Edinburgh on 17 January and London on 31 January saw the presentation of the report of the Discount Rates Steering Committee, Developing a framework for the use of discount rates in actuarial work. The report aims to enable the Profession to continue to speak clearly and with authority in future debates about discount rates and to support actuaries in communicating impartially and effectively. The report builds on the initial research undertaken by Chinu Patel and Chris Daykin which was commissioned by the Management Board and looks at developing a common language and framework for using discount rates in actuarial work.
The Discount Rates Steering Committee would like to thank all those who shared their views on the report in the first quarter of 2011.
Discount rates forum, 23 March 2010
Review of the meeting
Background and call for proposals, issued December 2009