PPF changes could reduce number of eligible schemes
UK - Proposed changes to mortality and discount rate assumptions in pension scheme valuations could result in fewer schemes entering the Pension Protection Fund (PPF) in future.
The PPF has issued a five-week consultation on changes to the section 143 and section 179 assumptions, to bring them in line with pricing in the buyout market, following recent developments and the expansion of the sector.
It revealed mortality assumptions would be changed to the medium cohort mortality improvement rates, alongside a 1% floor to annual improvements, while the organisation intends to increase all existing discount rates by 0.3%, although all other assumptions will remain unchanged.
That said, the PPF confirmed the changes would not come into effect until March 31 2008, which means PPF levies would not be affected until the 2009/10 financial year.
The organisation - which pays compensation to members of schemes where there has been a "qualifying insolvency event" - revealed assumptions had not been changed since 2006, adding "in the light of recent developments and the expansion of the buyout market, the PPF is considering, subject to consultation, making some changes to these assumptions, to bring valuations into line with market prices".
As a result, the PPF confirmed these changes could result in less schemes entering the fund, because "valuations based on the proposed new assumptions may mean they are able to pay benefits greater than PPF levels of compensation", which are currently around 90% of benefit entitlements.
But Alan Carey, from actuarial services at Alexander Forbes Financial Services, warned there is a "very real danger of schemes being left in limbo" if there is a "hardening of the insurance market" in the two years it will take for the changes to take place.
"Members of a scheme with an insolvent employer could be incorrectly assessed as being fully funded against the PPF benefits. Members would therefore end up with less than the declared level of minimum benefits as the PPF would not support the scheme," he said.
"The PPF's decision to refine its assumptions in line with movements in insurance company terms should be applauded but the lack of flexibility shown needs to be investigated. It would be interesting to know how many more schemes the PPF anticipates rejecting at the assessment stage as a result of the proposed changes," added Carey.
The consultation, which is open to all interested parties, will close on March 14 2008.
The decision by the PPF follows confirmation from The Pension Regulator (TPR) it will issue a consultation on Monday on the possible introduction of a pension funding "trigger" based on mortality assumptions. (See earlier IPE.com story: TPR to introduce mortality funding 'trigger')
Although TPR is suggesting the use of the stronger 'long' cohort improvement rates, instead of the PPF's 'medium' cohort rates, which has triggered concerns from consultants.
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