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IPE special report May 2018

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PPF valuation changes may reduce costs by up to 10%

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  • PPF valuation changes may reduce costs by up to 10%

UK - Planned changes by the Pension Protection Fund (PPF) to the assumptions used in section 143 and 179 valuations could reduce these liabilities by around 8% for pensioners and 10% for deferred pensioners.

An s143 valuation is used to estimate the cost of securing benefits for scheme members through a bulk annuity, to ensure it is not transferred to the PPF if the potential benefits are "at least equal" to PPF compensation, while the s179 valuation - used in calculating pension levies - is "in principle very similar to an s143 valuation but contains several simplifications".

The assumptions were last revised in March 2008 following discussions with 12 insurers active in the bulk annuity market. But a review at the end of last year concluded while there was some evidence the PPF's assumptions "should be weaker", the buyout market was very uncertain so in March 2009 it confirmed the assumptions would remain unchanged. (See earlier IPE article: PPF adopts mortality changes as TPR issues dispute code)

The PPF has now announced that following "several structured discussions about pricing assumptions" with six active buyout participants in April 2009 and a "check on our conclusions" in July, it believed there was sufficient evidence to alter the following valuation assumptions to bring them in line with market prices:

increase the yields used to discount future payments by 0.1% p.a in deferment; increase the yields used to discount future payments by 0.3% p.a. in payment; change one of the yields used as a reference point from a 10-year index to a 15-year index for the non-increasing pension assumption; increase the assumption about future longevity improvements for males; reduce the proportion of members who are married or who have relevant partners by 5%.

The changes are proposed to come into effect for valuations after 31 October 2009 so it would have "almost no impact" on PPF levies for the year 1 April 2010 to 31 March 2011, as these will be set in relation to existing s179 assumptions, so the first year fthe new assumptions will significantly affect the levy will be the year beginning 1 April 2011.

In the consultation document outlining the changes, the PPF noted the message from the insurers obtaining the most buyouts was that "the yields we are using, particularly for pensioners, are too low".
 
It has subsequently proposed three discount rate changes, of which the increase in yields for discounting future payments would "be expected to decrease s143 and s179 liabilities by around 3% for pensioners and 5% for deferred pensioners".

The impact of the third change - to move the index from 10 years to 15 years to better reflect the duration of bonds held by insurers - "would vary according to the slope of the gilts yield curve", however the PPF noted that based on yields at 12 June 2009, when the yield curve was upwards sloping, this change would reduce liabilities by around 5%.

Of the other two changes, the consultation revealed increasing the underpin on annual mortality improvements for males from 1% per year to 1.25% would increase liabilities by around 1%, while the decision to reduce the proportion of married members by 5% would reduce costs by just 0.5%.

The PPF therefore confirmed: "Overall, based on model calculations, the changes are expected to decrease s143 and s179 liabilities by around 8% for pensioners and around 10% for deferred pensioners".

The consultation on the proposed changes will close to comments on 11 September 2009.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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