Is the standard table approach still relevant?

For the last 95 years(1) the Continuous Mortality Investigation has been producing tables annually, setting out the life expectancy rates for people in the UK. These tables, which are produced by mathematical model, have been widely adopted by most pension schemes in the UK – and represent the average person, of average health with an average income.

In 2020, however, the system failed; the pandemic meant that data collected no longer fitted the model used by the CMI. CMI_2020 was not fit for purpose and the word from the CMI was that at it would change its model and “place no weight on the data for 2020 when projecting mortality rates.”(2)

2020 certainly was a long-tail unexpected event. We need to allow for these, but this has also forced the debate of how we should be determining mortality – and whether standard models are appropriate for most pension schemes or not?

What do the experts say about this? At MorganAsh our strong view is that schemes should be taking an evidence-based approach to setting mortality assumptions. This means finding out about the health of the actual members in the scheme and setting individual assumptions relevant to the actual health profile of the membership. This is now possible, using Medically Underwritten Mortality Studies for pension schemes.

Comments from other experts include the following:

“At this stage we suspect many schemes are likely to adopt a ‘wait and see’ approach through remaining on CMI_2019, or adopting CMI_2020 with no allowance for 2020. However more sophisticated users may wish to revise their assumptions.”

Club Vita

“Right now, predicting the outcome for a given pension scheme is very challenging and will depend on how a scheme’s membership is affected, which will vary with the age- and sex-profile of its members (the immediate impact will be bigger for schemes with older and more male memberships) and potentially where they live. The profile of deaths in the population will also continue to evolve.”

Stephen Caine, Senior Mortality Consultant, Willis Towers Watson (3)

The Pensions Regulator also supports an evidence-based approach to choosing mortality assumptions.

So how do you create evidence-based mortality assumptions? MorganAsh has a track record of helping companies improve the quality of their demographic assumptions through gathering actual health data about scheme members. This allows schemes to make better informed decisions around valuations and, in turn, reduce their pension scheme deficits – by removing unnecessary prudence and inaccuracies built into the standard tables produced by the CMI.

Typically, we see pension valuations reduce by 5-10% following a review by this method but, most importantly, sponsors and trustees gain from an insight into their membership that they would otherwise not have.

Surely this is something trustees and sponsors should be looking at now? To find out whether the timing is right for your scheme, and to find out more, contact us.

Refs

(1)   Continuous Mortality Investigation Limited Directors’ Report dated 29 Feb 2016.

(2) CMI to modify Mortality Projections Model for CMI_2020 | Institute and Faculty of Actuaries

(3) What could the mortality impact of COVID-19 be for pension scheme liabilities? - Willis Towers Watson