FCA Methodology – Sensitivity Analysis

RPI will be aligned with CPIH from 2030 which means that the methodology used to price CPI liabilities relative to RPI – usually with a 1% differential needs reviewing.  The FCA has commissioned PWC to provide the analysis and recommendations.  They arrived at a table of margins split between the pre-retirement period (from 1-40 years) and retirement ages (principal ages 55 – 75) with the justification that it was “simpler” to implement than using an alternative more robust modelling approach.

This “static” approach uses the prescribed table based on inflation market data as of 31/12/2020.  That means it is sensitive to market changes – in particular quarter on quarter movements of inflation rates.  The table below (derived using our internal models) shows changes in the principal retirement ages of 60 and 65 with term to retirement up to year 11.  It can be seen that the margins derived are pretty stable over quarter end dates during 2020 and therefore there is some justification for use of this static approach.

Quarter end (2020)Dec (Default) Sep Jun Mar 
NRA6065606560656065
Years to NRA        
0 ≤ x < 1 0.45%0.60%0.50%0.60%0.50%0.60%0.45%0.60%
1 ≤ x < 2 0.40%0.55%0.45%0.55%0.45%0.55%0.45%0.55%
2 ≤ x < 3 0.35%0.45%0.40%0.45%0.40%0.45%0.40%0.45%
3 ≤ x < 4 0.30%0.40%0.35%0.40%0.35%0.40%0.35%0.40%
4 ≤ x < 5 0.25%0.35%0.30%0.35%0.30%0.35%0.30%0.35%
5 ≤ x < 6 0.20%0.30%0.25%0.30%0.25%0.30%0.25%0.30%
6 ≤ x < 7 0.15%0.20%0.20%0.20%0.20%0.20%0.20%0.20%
7 ≤ x < 8 0.10%0.15%0.15%0.15%0.15%0.15%0.15%0.15%
8 ≤ x < 9 0.05%0.10%0.10%0.10%0.10%0.10%0.10%0.10%
9 ≤ x < 10 0.05%0.05%0.05%0.05%0.05%0.05%0.05%0.05%
10 ≤ x < 11 0.00%0.00%0.00%0.00%0.00%0.00%0.00%0.00%

The change in these CPI assumptions however give rise to somewhat significant changes in the capital value of the pensions that are linked to CPI – particularly for young members and/or early retirement dates.  The table below shows the change in value (in % terms) pre and post changes to the FCA methodology for pension linked to CPI (revaluation) – CPI (escalation).

Revaluation – EscalationCPI-CPI  
 NRA  
Year to retirement556065
114%11%7%
316%12%9%
518%14%10%
719%16%12%
1023%19%15%
1528%25%21%
2036%32%28%
Average22%19%15%

Users of our Congruent CalculationTM platform will be able to perform pension redress calculations using the new FCA methodology from 06 April 2021.

Share on twitter
Share on linkedin
Share on facebook
Share on email