Valuation assumptions
Historical and current data
historical
Current
country-wide population stats
global sources of information
other pension schemes'' data
scheme specific data
Statements by governments or controlling banks
industry forecasts
views of the company directors
relationship between current yields on fixed and index-linked bonds
Limitations of data
Conflict between...
having relevant data
sufficient data for a scheme's analysis to be statistically credible
BEST ARCHER
Balance of homogeneous groups underlying the data
Economic situation may have changed
Social conditions may have changed
Trends over time e.g. medical, demographic
Abnormal fluctuations
Random fluctuations
Changes in regulation
Heterogeneity within the group to which the assumptions will apply
Errors in data
Recording differences
Discounted cashflow valuation
Assets and liability cashflows are both valued using the same long-term assumptions
Market-related valuation
Assets are valued at MV
Consistent 'market-related' discount rates is needed to value the liabilities
Asset-based discount rate
Replicating portfolio
mark to market
bond yield plus risk premimum
Options and guarantees
(factors to consider)
neutrality/ fairness
simplicity
consent
market-related factors
desire to encourage/ discourage take-up
selection
regulation
DC benefits
(important considerations)
margins are usually excluded from the basis
the assumptions should reflect individual circumstances
pre-retirement decrements should be excluded
may be shown in current value terms or as a % of projected final salary
the sensitivity of results to the assumptions made and options chosen should be demonstrated
the assumptions should reflect the method of provision chosen
Prudence
(factors to consider)
Purpose of the calculations
the objectives of the parties involved
Specifics of the scheme
reliability of the information on which the assumption is based
historic information on the extent of variation in the assumption
strength of the employer covenant supporting the scheme
the level of investment risk being adopted
the maturity of the scheme
the financial significance of the assumption in the overall valustion
Consistency (the extent to which other assumptions are prudent)
external factors such as legislation and professional standards