PSI20.2.14 - Funding and Surpluses: Self-Administered Schemes - Form of Actuarial Reports - “Original Cost”

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

The “Original Cost” method involves valuing each asset at cost price until sold. It is simple but takes no account of increases in asset values until they are sold. Assets valued in this way may thus not be reflecting their true worth and so the fund may be larger than actually presented. This will not be a problem in a scheme subject to the Pension Scheme Surpluses (Valuation) Regulations since such a scheme is also required to carry out a prescribed basis valuation (see PSI20.6.11). But in a small self- administered scheme, assets valued by this method may disguise a “hidden surplus”. In these circumstances if this basis has been used, and no enquiry has previously been made, you should ask why it is considered more appropriate than a discounted future income basis. Consider the reply on its merits. Sometimes the actuary uses this method because he/she has not fully taken account of a particular benefit when valuing the liabilities, for example, discretionary pensions increases awarded by the trustees. This is not acceptable. If you come across such a situation you should challenge it and explain that based on advice from the Government Actuary’s Department the position is not acceptable and must be rectified. Your aim should be to ensure that an undervaluation of assets does not result in larger contributions being paid than is justified. If in doubt consult your Section Manager.

Contact: | Date issued: | Next review: