Select Committee on Members' Fund - Report by the Government Actuary on the Valuation of the Fund as at 30 September 2003 Report


6. ACTUARIAL ASSUMPTIONS

  6.1  In order to compare the value of the liabilities, comprising future outgo on grants awarded to beneficiaries, with the value of assets, comprising future contributions and investment income (and other proceeds) from the assets held in the Fund, it is necessary to discount these items at interest.

  6.2  As the level of grants is reviewed annually, provision must be made for future increases. In recent years the annual increases have been similar to those awarded each year under the Pensions (Increase) Acts. Although there is no statutory link, I have assumed that this practice will continue in the future and that grants will increase annually in line with the increase in prices. There is a broad correlation between the levels of interest rates and inflation, and the difference between them is more important than their absolute value when valuing liabilities linked to price inflation.

  6.3  For the current valuation, I have adopted a market-related approach such that the investment return on the Fund net of inflation is assumed to be the real yield available in the open market, on the valuation date, on investment in a medium-dated index-linked gilt portfolio. Accordingly, a discount rate of 1.86% p.a. net of price inflation has been used to value the Fund's liabilities. For consistency with the approach taken to valuing the liabilities, it is appropriate to take the assets into account at their market value.

  6.4  An assumption of future mortality of the Fund's recipients is also required. I have updated the rates of survival used for the 2000 valuation to reflect the recent trends of improving mortality. It has been assumed that all awards will continue for life and that, on the death of a married former Member, an allowance will be paid to a surviving spouse.

  6.5  Over the period since the last valuation administration expenses have averaged around £31,000 per annum. Taking account of the outstanding term of the liabilities, I have included a reserve of £400,000 to cover the future administration costs in respect of the Fund's existing liabilities. This reserve is a provision for the purposes of this actuarial valuation. It should not be taken as a formal estimate or quotation of the cost of an external administrator carrying out the administration work.


 
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Prepared 28 October 2004