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The Actuary The magazine of the Institute & Faculty of Actuaries

Understanding the P-word

Having spent many years dabbling in actuarial valuations for a large life office, I’d like to think I have an instinctive feel for the meaning of ‘prudence’ in the choice of valuation assumptions. As a pension scheme trustee, I was pleased when the p-word finally appeared in regulations about scheme funding. It filled what seemed to me like a gaping hole in a regime designed to offer security to members in an uncertain world. Given prudence’s long history in the world of insurance, I assumed wrongly that its interpretation would present few problems for pensions actuaries. The impression given by the trade press was that actuaries’ views ranged from ‘tricky, we need to go away and think about this’ to ‘let’s not get bogged down in the idea that we need to build contingency margins into our assumptions’.

The Pensions Board’s e-alert about mortality assumptions seems to perpetuate the uncertainty. It confirms that the Scheme Funding Regulations state that actuarial assumptions must be chosen prudently. It goes on to say that both FRS17 and IAS19 require best estimates of likely future experience. It then concludes that it is possible (my italics) for mortality assumptions used for accounting purposes to differ from those used for scheme funding.

Possible? If one assumption is prudent and the other a best estimate, are they not necessarily different?