The Pension Protection Fund (PPF) has launched a consultation on proposed changes to the assumptions it uses for certain valuations which provide an estimated price for bulk annuity providers in the buyout market.
When a scheme’s employer becomes insolvent, a valuation is needed to assess if the scheme could secure benefits with an insurer above the levels provided by the PPF.
The proposed changes to the assumptions are designed to ensure those schemes that may be able to secure benefits above PPF levels are given the opportunity to test the market.
The PPF is proposing adopting a yield-curve approach when assessing schemes for entry to the PPF under section 143 of the Pensions Act 2004.
This approach will place a more accurate value on liabilities. The change has been proposed following feedback from a previous consultation where stakeholders suggested a shift to this approach would be appropriate.
Valuations carried out for levy purposes under section 179 of the Pensions Act 2004 will not be moved onto this more complex approach, the PPF confirmed.
Other proposed changes include increasing discount rates for certain types of benefits, moving to the latest mortality projections model, and amending the calculation of expenses. The combined impact for almost all schemes will be a reduction in the assessed value of scheme liabilities.
Lisa McCrory, PPF’s chief finance officer and chief actuary, said: “It is important that those schemes that have sufficient assets to secure benefits above PPF levels when their employer becomes insolvent are given the opportunity to test the market. Our proposed changes will ensure that our valuations are in line with the current market pricing and result in the best outcome for members.”
The PPF has adopted 10 principles for setting the new assumptions, including ensuring the assumptions deliberately focus on understating the liabilities, and ensuring they are informed by regular meetings with industry stakeholders.
Focusing on understating liabilities means that for certain valuations it reduces the risk of taking schemes into the PPF that, as at the date of the employer’s insolvency, could have bought out better benefits in the market.
The consultation will close on 20 February and seek views from actuarial professionals and industry stakeholders on whether there is agreement with this approach and when it should be introduced.