This website is entirely my own creation and has nothing to do with any former employers. Not only do I accept all responsibility but also I assert all rights over the site’s content. The views expressed are entirely personal and not endorsed by the UK actuarial profession, at least not yet, and my work has not been peer reviewed. Thanks are due to those who have discussed issues with me over time… and to those who have refused to engage. Family and friends have been supportive, for which I remain grateful.
For the avoidance of doubt, I am not criticising either scheme actuaries or the pension regulator, just the framework within which they are forced to operate.
Some pages may appear repetitive but I don't know which route you'll take and several pages have little content - deliberately. Nothing on this website constitutes “advice”.
Although this website has a lot in common with “smoothfunding”, this one is rather simpler. There, several years ago, I started trying to deal with defined benefit pensions whereas I am now only dealing with really simple contracts where the payments are certain. My basic question is why we think we can get complex stuff right if we can't get the basics correct - which I regret I rather doubt. It seems to me that we need a great deal more balance between views about the short term and the long term views.
Typically, any financial entity's assets and liabilities are periodic cashflows over time, short or long; capital values are only poor representations of those cashflows. Consistency between future cashflows in both directions should be sought. However convenient it may have been in the past to represent them by scalar values, that approach conceals far more than is revealed. Given the enormous computing power now readily available, there is no good reason to retain the use of scalars instead of using stochastic projections, which would allow stakeholders a more direct choice of risk appetite.
However, as scalars are still required by the regulators, at least in UK DB pension space, this website starts by considering how to derive “discount rates” as sensibly as we can. We will need to deal with some terminology and background. We can then move on to the contracts considered, the variables taken into account and pricing approaches, following which we can look at outcomes, shown as dynamic Flash charts. During 2020, especially for Apple device users but also for some Windows users, I'll use HTML5 instead but not just yet, sorry about that.
Ultimately, I am driven to the conclusion that actuaries should stop using discount rates alone for long-term projects with specified intended outcomes because cashflows are the key elements. If we can’t do simple stuff, can we really solve complex problems?
Jon 20 January 2020