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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