FRC: AS TM1 assumptions to remain unchanged

6 Jun 2019 09:56 AM

The FRC has conducted a review of the assumptions set within Actuarial Standard Technical Memorandum 1 (AS TM1) that are mandated for use in the annual Statutory Money Purchase Illustrations (SMPIs) received by people saving for retirement in defined contribution pension plans.

Each year there are over 30 million SMPIs produced in respect of these defined contribution plans.

We concluded that no change will be made to the assumptions and that the current version (V 4.2) will remain in force for SMPIs produced in the year beginning 6 April 2020.  The main reasons for this conclusion are: 

• The existing assumptions remain within a reasonable range so that change is not required urgently and there is value in consistency from year to year.
• The Pensions Dashboard has the support of industry and government.  It is progressing and is intended to bring together all pension rights of each person in one place.  This has the potential to revolutionise the way that projections are performed and presented in ways that are difficult to predict currently.
• The Continuous Mortality Investigation (CMI) is anticipating that next year they will issue a new base table for mortality and are looking to increase the flexibility available to users of their mortality tables.  It is uncertain what impact this may have on the annuity market in practice.
• The UK's EU exit continues to remain a source of uncertainty to economic conditions and makes economic and fiscal prediction more difficult and potentially more volatile.
• Pensions Freedoms have fundamentally impacted the nature of pensions saving.  Annuities are currently much less popular than previously (partially because of the high cost associated with them in low interest times and partially because Pensions Freedoms allow people access to their funds in more immediate ways).  The annuity market has contracted but it is too uncertain to know whether annuities will become popular once more if and when fixed interest yields rise.

Given these initiatives and uncertainties it was concluded that now is not the time to make changes to the AS TM1 assumptions.

As such the current version of AS TM1 (version 4.2) will remain in force until further notice.  However, as the above initiatives progress, it will be important for their impact to be reflected in subsequent versions of the pension projection assumptions.

The FRC has responsibility to set and maintain the assumptions used to produce the Statutory Money Purchase Illustrations (SMPIs) sent annually to individuals who have Defined Contribution (DC) pension plans.

To meet this responsibility FRC reviews the assumptions in AS TM1 which governs these illustrations against the background of current and anticipated economic and demographic experience.  In addition, we monitor those assumptions in which providers have a degree of flexibility (for example the choice of accumulation rates to be used in the projection).

For more information contact astm1@frc.org.uk