Commissioned project - This research project covered three areas; a survey of current practices, a survey of existing research and debate, and the developing of a common language for communicating current practice on discount rates and risk

Survey of current practice

A survey of the different discount rates that are currently used for different purposes in each practice area in the UK, including: 

  • How these rates might have been constructed/determined/chosen
  • The historical perspective
  • The legislative framework
  • The nature of the promises made
  • The impact of government legislation in changing the nature of some promises over time (e.g. increasing the guarantees and reducing discretion). 

Particular attention was paid to understanding who the liabilities are in respect of, what they need them to show, the extent to which risk is included in the discount rates, and how that has influenced the discount rates used historically including:

  • Shareholders
  • Policyholders
  • Management
  • Regulators
  • Trustees
  • Pension scheme members

The international arena should be considered where it seems to have a particular bearing on the position in the UK but a full survey of international practices is not proposed.

Survey of existing research and debate

A summary of the existing research on the subject of discount rates and a synthesis of the arguments, including a survey of any recent public debate on the subject.

The research will need to consider future developments in discount rates that are already underway (e.g. international accounting standards, Solvency II) including key dates.

Developing a common language for communicating current practice on discount rates and risk

Developing a common language to describe current practices and the rationale behind different discount rates, and improve the communication of discount rates, particularly to users of actuarial services and relevant external stakeholders.

To describe why and how risk is included in discount rates in different circumstances and the rationale behind similarities and differences. 

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