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. I have assumed that this practice
will continue in the future and that grants will increase annually
in line with the increase in retail 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 assessment, I have adopted
a market-related approach such that the interest rate used to
discount the liabilities falling due in future years is the real
yield available in the open market, on the reporting date, on
investment in a medium-dated index-linked gilt portfolio. Accordingly,
a discount rate of 1.5% a year 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 It is 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. The longevity of
the Fund's beneficiaries is the main demographic assumption. The
evidence suggests that the longevity of the UK population has
increased materially in recent years, and more quickly than had
previously been anticipated by demographers and actuaries. However,
there is no consensus about the likely rate of future improvement
in mortality. I have taken account of recent evidence in setting
appropriate mortality assumptions for this report.
6.5 Over the two years leading up to the
reporting date, administration expenses have averaged around £65,000
a year (the costs in 2003-04 were significantly higher but this
is understood to have been exceptional). Taking account of the
outstanding term of the liabilities, I have included a reserve
of £800,000 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 investigation. 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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