Following consultation in May, the FRC has published a draft revision to actuarial standard TM1.
AS TM1 sets out how pension providers should establish assumptions about future investment returns used in the illustrations they give to pension savers of what their pension might eventually be. Providers should make justifiable assumptions that take account of the nature of their members’ investments rather than using standard numbers. The FRC believes this approach should produce information that is better tailored to savers’ circumstances. Accordingly the FRC is removing the current maximum 7% cap on assumed investment returns which has at times been adopted by some providers as a default assumption.
If, following consultation, these proposals are adopted the FRC will review their implementation carefully to ensure providers are making justifiable assumptions.
So savers can understand the basis of the illustrations the FRC encourages providers to give pension savers information about the assumptions used on request.
Commenting on the proposed revision, Olivia Dickson, Chairman of the FRC’s Actuarial Council, said:
“Several million people receive Statutory Money Purchase Illustrations every year. Providers must think very carefully about the investment returns which they assume in these illustrations and take account of how much of each pension scheme member’s fund is invested in cash, bonds, shares and so on. Providers should document and be able to justify the assumptions on which the projected investment return for each member’s fund have been calculated.”
Notes to editors:
The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
Since 6 April 2003, members of certain money purchase pension arrangements must be provided with Statutory Money Purchase Illustrations (SMPIs). SMPIs are produced in accordance with the Disclosure Regulations. Actuarial Standard Technical Memorandum 1: Statutory Money Purchase Illustrations (AS TM1), which is issued by the FRC, sets out the methods and assumptions to be used in producing SMPIs. The FRC reviews AS TM1 regularly.
On 31 May 2012, the Financial Services Authority and the FRC published a joint consultation paper which considered various aspects concerning assumptions which are used in projections of money purchase pensions. The joint consultation can be found at: http://www.fsa.gov.uk/library/policy/cp/2012/12-10.shtml
Analysis of the feedback to the FRC’s part of the consultation, the exposure draft of version 3.0 of AS TM1 and a version highlighting changes from version 2.0 can be found at https://www.frc.org.uk/Our-Work/Codes-Standards/Actuarial-Policy/Actuarial-Standard-Technical-Memorandum.aspx
The closing date for responses to the consultation is 12 December 2012.
The FSA’s feedback on the responses to the joint consultation, and the changes it has made to its rules, can be found at http://www.fsa.gov.uk/library/policy/policy/2012/12-17.shtml
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