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UK’s PPF consults on changes to key valuation assumptions

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The UK’s lifeboat fund for defined benefit pension schemes, the Pension Protection Fund (PFF), is proposing to amend assumptions for key valuations to reflect changes in bulk annuity pricing, which would have the effect of improving schemes’ aggregate funding position captured by the PPF’s 7800 index.

Separately, the UK government launched a consultation on a proposal to increase the PPF compensation cap for long-serving members of pension schemes.

It is proposing an increase of 3% for each full year of pensionable service above 20 years, subject to a new cap of double the standard maximum.

The current cap is £37,420 (€43,909).

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The new regulations are due to come into effect by April 2017.

A PPF spokeswoman acknowledged that the proposed changes to the long service cap would entail higher costs for levy payers, by way of increased compensation costs, but added that “the increase in liabilities of the proposed changes would be smoothed over many years, meaning we expect no jump in levies”.

PPF actuarial valuation update 

The PPF’s consultation is about the actuarial assumptions used for section 143 valuations, which determine a scheme’s eligibility for the PPF if its sponsor goes bust, and section 179 valuations, which determine a scheme’s underfunding.

The level of underfunding, in turn, determines the levy a scheme should pay to the PPF.

It said the most significant changes it was proposing were to use separate discount rates for pensioners and non-pensioners post retirement and yield indices that have durations that better match average liability durations, including the introduction of a new index-linked Gilt yield.

It also proposed updating mortality assumptions.

The current assumptions have been in effect since 1 May 2014, based on a review of bulk annuity market pricing carried out in December 2013.

Since then, Solvency II regulations for insurers have come into effect, with the PPF taking this into account in addition to buyout pricing as at the end of May 2016 and the immediate impact from the Brexit vote in the UK’s EU referendum in late June.

“We used this evidence base,” the PPF said, “for the purpose of resetting the section 143 and section 179 valuation assumptions.”

It builds this evidence base in discussion with bulk annuity providers.

The cumulative impact of the proposed changes would be to reduce the value of liabilities under section 143, mainly because of the changes to the mortality assumptions.

The overall impact is a 5% reduction for pensioner liabilities, and 3% for non-pensioner liabilities.

The changes to the section 179 assumptions would improve the aggregate funding position of schemes eligible for the PPF, as tracked by the fund’s 7800 index.

The PPF said the aggregate funding ratio would increase from 76% as at 31 August 2016 to around 79%, and that around 150-200 schemes would move from deficit to surplus.

The overall deficit of schemes with shortfalls (5,042 out of 5,945 as at the end of August) would fall from £489bn to around £430bn, according to the PPF.

The PPF spokeswoman said the fund did not expect the changes to have a material effect on the overall level of levy bills for schemes.

“Schemes will not necessarily pay higher or lower levies because of them,” she said.

The fund said the assumptions used to measure underfunding in the levy formula would remain fixed until the next triennial valuation period (2018-19 to 2020-21), so that the overall impact on levy for the last year of the current triennium was “expected to be minimal”.

The consultation closes on 31 October.

The intention is for changes to be introduced from 1 December 2016.

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