Police and Firefighters' Commutation Tables

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Dear National Audit Office,

In your report entitled -

Government Actuary’s Department
Investigation into Police and Firefighters’ Pension Scheme commutation factors

you state at -

"2.6
In November 2002, the Office of the Deputy Prime Minster (then responsible for the Firefighters’ Scheme) enquired about the value of benefits being provided by the scheme. GAD’s response noted that the life expectancy of firefighters in retirement, used to calculate the commutation factors, had been set at the same level for many years. GAD also noted that other public sector schemes were reflecting increased longevity in their assumptions and that, in the absence of firefighter-specific data, the public sector scheme assumptions would probably be used for the Firefighters’ Scheme. This suggests that GAD had reasonable knowledge that the commutation factors did not reflect those in use across other public sector schemes."

Furthermore, you add at -

"2.7
In April 2004, in response to a formal request from the Office of the Deputy Prime Minister to review actuarial assumptions, GAD noted that improvements in life expectancy had exceeded all previous expectations and commented that the commutation factors would probably be found to be too low. Further internal emails substantiate this point, as highlighted within the Ombudsman’s determination. However, at this stage an explicit statement that the factors no longer bore actuarial equivalence was not made. It was also noted in internal emails that, even if the factors were found to be accurate, GAD was still concerned that they had not been reviewed frequently enough.
2.8
During this period, GAD provided assistance in relation to the implementation of the new Police Pension Scheme. In November 2005, GAD commented in an email to the Home Office (HO) that many of the extant factors were out of date and that they would have difficulty recommending that they be used for the new scheme. The similarity in nature between the Police and Firefighters’ Schemes means decisions on one scheme have significant relevance to the other.
2.9
Life expectancy on retirement increased significantly throughout the late 90s and 2000s. This has a commensurate impact on commutation factors, if the impact has not been factored into the assumptions, as individuals are sacrificing pension payments over a predicted longer period, resulting in increases to the lump sum payments. GAD was aware of these trends through its actuarial role across the government’s pension schemes.
2.10
It is clear, therefore, that GAD was aware of the mortality trends which affect commutation factors. This was a broadly known trend and even had GAD not known the exact effect, they would have been aware that it was likely to materially affect commutation payments in the Police and Firefighters’ Pension Schemes. In addition, GAD had historically prepared commutation factors for these relevant schemes and the fact that it was no longer producing them should have been raised with the pension schemes to consider whether this was appropriate. Even if GAD was correct in its reading that it did not have a statutory duty to prepare the tables, it had a duty to ensure the departments were fully aware that the commutation factors did not reflect the underlying trends."

Clearly, GAD realised that the Commutation Factors in use were not fit for purpose. As you state at -

"2.3
The general principle for actuarial equivalent factors is that they correlate to the number of years an individual would be expected to drawdown the pension. They, therefore, increase to provide a greater lump sum if the relevant population is anticipated to live longer."

Closer examination reveals that -

"2.4
Historically, GAD has prepared commutation factors proactively for the Police and Firefighters’ Pension Schemes. Reviews took place in 1982, 1986, 1994 and 1998." &

"2.5
In July 1998, GAD reviewed the commutation factors applicable to the Firefighters’ Pension Scheme. This review recommended that the commutation factors be reviewed three years later. However, this scheduled review did not happen and these factors were applied to lump sum payments up to 22 August 2006 for the Firefighters’ Scheme."

You give an example of a commutation calculation at -

"Figure 3
Operation of commutation factors
Commutation factor – Example1
Mr Smith has a pension which will pay him an annuity of £20,000 per year. The commutation factor relevant to him has been calculated as 15. He wishes to sacrifice £5,000 per year and take this instead as a lump sum. He will therefore receive (15 x £5,000) = £75,000 as a lump sum, with annunity remaining of £15,000 per year."

It should be noted that, despite the GAD reviews mentioned at 2.4 above, the commutation factor remained at 15 from 1982 to 2006. (See Home Office Circular No.116/1982 - Fire Service Circular No 23/1982) As your report identifies repeatedly, the commutation factor between 1998 and 2006 would have been expected to rise.

Was this also the case between 1982 and 1998?

"1.11
Since the formation of the schemes, police and firefighters have been able to commute a portion of their pension for a lump sum. Based on established trends in life expectancy throughout the late 1990s and 2000s and given the requirement for actuarial equivalence, it is clear that during this period, the commutation factors applied to individuals in these schemes would be expected to increase."

Can you please provide all information that you have to support this expectation of an increase in commutation factors and when exactly do you consider the " late 1990s and 2000s" to cover?

What information do you have to show that GAD was aware of these increases in life expectancy?

Yours faithfully,

Barry Ashcroft

FOI, REQUESTS,

REFERENCE: FOI-1107

 

Dear Mr Ashcroft,

 

Thank you for your request for information relating to the National Audit
Office’s report: ‘Investigation into Police and Firefighters’ Pension
Scheme Commutation factors,’ published 1 February 2017.  You quoted
various sections of the report, and requested information as follows:

 

·         Can you please provide all information that you have to support
this expectation of an increase in commutation factors and when exactly do
you consider the " late 1990s and 2000s" to cover?

 

·         What information do you have to show that GAD was aware of these
increases in life expectancy?

 

I confirm that your request was received 27 October 2017 and I am dealing
with it under the terms of the Freedom of Information Act 2000. 

 

If you have any questions about this email, please contact the FOI team.

 

Yours sincerely,

 

Joseph da Silva | FOI Team
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FOI, REQUESTS,

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Dear Mr Ashcroft,

 

Please find, attached, our response to your Freedom of Information
request, together with the released information.

 

Yours sincerely,

 

Joseph da Silva

FOI | Correspondence | Records | NAOTank Admin

Policy team

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The information contained in this email, and any files transmitted with
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Such information may be confidential and privileged, and no mistake in
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