Developing a framework for the use of
discount rates in actuarial work – References and other material
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This paper explores the use of discount rates in actuarial
work. References within the paper are set out below. A summary of the paper is
available in: a framework
for the use of discount rates in actuarial work.
Abstract
The Management Board of the UK Actuarial Profession is
undertaking a thought leadership cross-practice research project on the use of
discount rates by UK actuaries. The timing for this research is particularly
appropriate as there is a convergence of interest in discount rates from within
and outside of the Profession. Discount rates are at the heart of most
actuarial calculations and are of significant public interest. As part of this
project the Management Board wants a full and open debate on the significant
issues and this paper is the next step in stimulating that debate, giving
another opportunity to influence the future direction of the project.
The Management Board set up a small cross-practice steering
committee to drive the project. The Discount Rate Steering Committee identified
five areas of work that would be needed to achieve the project's overall
objectives:
(1) A survey of
current practices
(2) A survey of
existing research and debate
(3) Developing a
common language for communicating discount rates and risk
(4) Developing a
common framework for the future where appropriate
(5) Considering the
impact of any changes.
Although the Profession does not set standards for technical
work it still has a significant role for undertaking research in the public
interest which supports the competence of its members and the furtherance of
actuarial science.
Chinu Patel and Chris Daykin were commissioned to undertake
the first part of this work and they presented their preliminary output at a
forum of thought leaders across the Profession and externally on 23 March 2010.
Their report “Actuaries and Discount Rates” was subsequently published in May
2010 and presented the results of their initial research into past and current
practice in the setting of discount rates in the UK, and a survey of existing
research and debate. A summary of that report is included in Section 2 of this
paper.
Following consultation both within and outside the Actuarial
Profession, this interim paper now takes forward the ideas and initial steps
developed by Patel & Daykin and looks at developing a common language and
framework for using discount rates in actuarial work. The Discount Rate
Steering Committee is making a number of recommendations to the Profession
which are intended to help actuaries speak clearly and with authority in future
debates about discount rates and to support actuaries in communicating
impartially and effectively. The recommendations are set out in Section 6 of
the report following the development of the framework in Sections 3-5.
As part of further developing the recommendations to the
Profession, the Discount Rate Steering Committee is seeking views from
stakeholders from inside and outside of the Profession. This will be undertaken
throughout January and February 2011 and, as part of this process, the report
will be presented at sessional research events in Edinburgh (17 January 2011)
and London (31 January 2011). The Discount Rate Steering Committee is committed
to seeking feedback on the recommendations and hopes this paper will give those
inside and outside the Profession an opportunity to add to the dialogue so that
as wide a range of potential views as possible is heard.
In this paper, the steering committee has concentrated on
the more technical aspects of developing a framework for communicating discount
rates and associated risks and the report is aimed primarily at actuaries. But
the committee is mindful of the need to help actuaries communicate more clearly
with those outside the Profession. During the first half of 2011, the steering
committee will therefore concentrate on producing a document in less technical
language to help non-actuaries understand the issues around the selection and
use of discount rates and to help actuaries in their communication with
stakeholders.