8th July 2008

Living Longer – At What Price?

Mortality Tables and Regulation

Contents

Mortality Tables and Regulation

Contents

Mortality Tables

Determinants of Mortality 4

Mortality Base Tables 6

Future Mortality Improvements 7

• Cohort effect 8

• Underpins 11

The Relationship between Base Table and Reduction Factor 12

Regulation

Current Assumptions Used 15

Recommendations of TPR 16

Impact of TPR Recommendations 18

2

Mortality Tables and Regulation

Mortality Tables

3

Which table does a pension scheme choose?

Mortality Tables

Mortality Assumptions

PMA92

PFA92

SPFL03 SPFA03

SPML03

SPMA03 SNMA03 SNMA03 Light

SNMA03 Heavy

SNFA03 Heavy

SNFA03 Heavy

SPFA03 Heavy

SPFA03 Light

SPMA03 Heavy

IML00

IFL00

PNML00

PNMA00

PEML00

PEMA00

PCML00

PCMA00

PNFL00

PNFA00

RMC00

RFD00

Short Cohort

Medium Cohort

Long Cohort

1% Underpin

2% Underpin

1.5% Underpin

ONS Principles ONS HLE ONS LLE

CMI TPR PPF

Actuary Sponsors Trustees

(decision maker) Advisor

4

ONS

Determinants of Mortality Tables

• When setting up mortality assumptions for valuation of scheme liabilities, we need to

make two decisions: base mortality rate and future improvement.

1. Base mortality rate (top three) determinants

- Age

- Sex

- Socio-economic group

2. Future improvement determinants

- Age effect

- Period effect

- Cohort effect

Mortality Tables

Determinants

5

Mortality Base Table Comparison

PA 92

Insurance data

“92” projection

Cohort projections

Split by sex

“00” Series

Insurance data

No projection

split by type of contracts, sex, retirement condition, pension payments and marital status.

SAPS “03” (Self Administrated Pension Schemes)

Pension scheme data

No projection

split by sex, health status, pension benefit levels and

marital status.

Data Time line – all data is complied by the Continuous Mortality Investigation bureau (CMI), a subcommittee of the Actuarial Profession.

“SAPS represent the great majority of defined benefit schemes. Consequently, this experience is likely to be highly relevant when choosing funding assumptions for such schemes… In January 2008, the CMI published a proposed range of SAPS mortality tables which can be expected to come into common use for future scheme valuations.” TPR (February 2008)

Mortality Tables and Regulations

Mortality Base Tables

6

Future Mortality Improvements (Reduction Factors)

• When projecting future mortality rates, we need to

make assumptions about age effect, period effect and

cohort effect.

• Due to the uncertainties about how long the cohort

effect will last, CMI made different assumptions and

produced 3 two-dimensional reduction factor tables to

value future pension benefits.

• These reduction factor tables include:

- Short Cohort Projection;

- Medium Cohort Projection;

- Long Cohort Projection.

Reduction Factors (mortality future improvement

assumptions)

Mortality Tables

Mortality Future Improvements

7

Cohort Effect - Recap

Source: Office for National Statistics

8

• In the UK, it is observed that people born between 1925 and 1945 (and centred around 1931) have

experienced a higher improvement in mortality than people born before and after this generation.

• This group of people are referred to as the Golden Cohort.

Mortality Tables

Mortality Future Improvements

Cohort Projections • To project future mortality rates, the question of how long the cohort effect will last needs to

be answered.

• CMI (Continuous Mortality Investigation) assumes a Short Cohort (until 2010), Medium Cohort

(2020) and Long Cohort (2040). Projected Mortality Improvements: Long Cohort projection after 1999.

Mortality Tables

Mortality Future Improvements

9

Projected Mortality Improvements: Medium Cohort projection after 1999.

Projected Mortality Improvements: Short Cohort projection after 1999.

Cohort Projections

Mortality Tables

Mortality Future Improvements

10

Underpins • “Underpin” is a minimum improvement rate of x% that applies to all ages and calendar years of

mortality improvements in the cohort projection.

• i.e. we assume that, for all ages and all future calendar years, mortality rates will keep reducing at x%

annually.

• Using an underpin ensures a base mortality improvement (at least equal to the value of the underpin)

for each age group and calendar year.

This example shows the medium cohort projection before and after applying a 1% underpin.

Before applying 1% underpin After applying 1% underpin

Reduction factor >1%

Reduction factor =1%

Reduction factor =0%

Reduction factor between 0% and 1%

2008 2009 2010 2011

87 2.37% 2.37% 2.45% 2.44%

88 2.06% 2.06% 2.17% 2.16%

89 1.76% 1.75% 1.89% 1.87%

90 1.45% 1.45% 1.61% 1.59%

91 1.15% 1.14% 1.32% 1.31%

92 1.00% 1.00% 1.04% 1.03%

93 1.00% 1.00% 1.00% 1.00%

94 1.00% 1.00% 1.00% 1.00%

95 1.00% 1.00% 1.00% 1.00%

2008 2009 2010 2011

87 2.37% 2.37% 2.45% 2.44%

88 2.06% 2.06% 2.17% 2.16%

89 1.76% 1.75% 1.89% 1.87%

90 1.45% 1.45% 1.61% 1.59%

91 1.15% 1.14% 1.32% 1.31%

92 0.84% 0.83% 1.04% 1.03%

93 0.53% 0.52% 0.76% 0.75%

94 0.49% 0.48% 0.48% 0.47%

95 0.45% 0.45% 0.44% 0.43%

Mortality Tables

Mortality Future Improvements

11

Base Table

xq

The Relationship Between Base Table & Reduction Factors Base Table

(PA92, “00”, “SAPS 03”)

Calculate survival probability from mortality rates

Life Expectancy

Future Mortality Rates xq

Reduction Factors • “92” series • Cohort projections: e.g. medium cohort • Underpins: e.g. +1%

Mortality Tables

Mortality Future Improvements

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1

2 3

4

5

Mortality Tables

Mortality Future Improvements

Example

• From the PMA92 base table, the life expectancy of a male aged 65 in 1992 is 16.9

years.

Using the same mortality base table, but now applying medium cohort projection, a

two-dimensional mortality table is generated.

• From this two – dimensional mortality table, we can calculate the cumulative survival

probability table.

• Summing up the cells that show future survival probabilities relating to this 65 year

old male in 2008, the life expectancy is now 22.0 years.

1

2 3

4

5

Mortality Tables and Regulation

Regulation

14

Company Life Expectancy Ranking

Sainsbury 21.5 17

Marks & Spencer 21.1 24

Morrison Supermarkets 20 47

Tesco 17.5 74

Current Assumptions Used by FTSE 100 Companies

Source: Financial Times

Regulation

Current Mortality Assumptions

15

• Trustees need to own the assumptions on mortality. • There are two separate decisions for trustees on mortality assumptions: - the baseline table for the current rates of mortality; and - the allowance for future improvements. • Trustees should adopt the terminology recommended by the CMI to aid transparency and understanding. — The Pensions Regulator, February 2008 Consultation document: Good practice when choosing assumptions for defined benefit pension schemes with a special focus on mortality

PA 92

“00” Series

SAPS “03”

Projections

“92” Projection

Cohort Projections

Underpins

Regulation on Mortality Assumptions

Regulation

Recommendations of TPR

16

Allowance for Future Improvements

• For recovery plans based on valuations with effective dates from March 2007, mortality assumptions that appear to be weaker than the long cohort assumption will attract further scrutiny and dialogue with the trustees where appropriate.

• Furthermore, assumptions which assume that the rate of improvement tends towards zero, and do not have some form of underpin, will also attract further scrutiny.

— The Pensions Regulator, February 2008

Consultation document: Good practice when choosing assumptions for defined benefit pension schemes with a special focus on mortality

Regulation

Recommendations of TPR

17

Impact of Mortality Assumptions on 65 Male Life Expectancy

Old S179 assumptions

New S179 assumptions

TPR new mortality regulation

Over 60% of FTSE 100 companies use this

table or less prudent projections

Regulation

Impact of TPR Recommendations

18

19.7

21.9 22

24

23.5

21.6

18

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21

22

23

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92 Series Medium Cohort (PMA92 base)

Medium Cohort 1% ("00" base)

Long Cohort 1% (PMA92 base)

Long Cohort 1% ("00" base)

Long Cohort 1% (SAPS "03" base)

Life

exp

ecta

ncy

fo

r 6

5 y

ears

old

mal

e as

at

end

of

20

06

Effect of Mortality Assumption on 65 Male Life Expectancy

Over 60% FTSE 100 companies use this

table or less prudent projections

Old S179 Assumption

New S179 Assumption

TPR New Mortality Regulation

0.90

0.95

1.00

1.05

1.10

1.15

1.20

92 Series Medium Cohort (PMA92 base)

Medium Cohort 1% ("00" base)

Long Cohort 1% (PMA92 base)

Long Cohort 1% ("00" base)

Long Cohort 1% (SAPS "03" base)

PV

of

Pe

nsi

on

Lia

bili

tie

s

Bill

ion

s

Effect of Mortality Assumption on PV of Pension Liability % change in PV compare with 92 series mortality assumption

0% 7.2% 8.1%

14.3% 12.8% 5.6%

Old S179 Assumptions

New S179 assumptions

TPR New Mortality Regulation

Over 60% FTSE of 100 companies use this

table or less prudent projections

Impact of Mortality Assumptions on PV of Pension Liability

Regulation

Impact of TPR Recommendations

19

Contacts

Dawid Konotey-Ahulu | Partner Direct: +44 (0) 207 250 3415 dawid@redingtonpartners.com Robert Gardner | Partner Direct: +44 (0) 207 250 3416 robert.gardner@redingtonpartners.com Redington Partners LLP 13 -15 Mallow Street London EC1Y 8RD Telephone: +44 (0) 207 250 3331

www.redingtonpartners.com THE DESTINATION FOR ASSET & LIABILITY MANAGEMENT

Contacts

Disclaimer

Disclaimer For professional investors only. Not suitable for private customers.

The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussion purposes only. A variety of market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that the parameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appear above are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions expressed herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this message is indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms of executed transactions should be treated as preliminary and subject to further due diligence .

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