Care is needed with bespoke PPF discount rates, says SPP
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The Society of Pension Professionals has welcomed the Pension Protection Fund’s proposed changes to s143 valuations but warns of potential unintended consequences.
Last month, the PPF issued a consultation on proposals to use bespoke discount rates for section 143 valuations of schemes with less than around £50m, to better reflect buyout pricing for smaller schemes. It said the current prescribed discount rate underestimated the price of buyout for smaller schemes.
The SPP welcomed the flexibility and agreed to introducing the change on 31 May.
However, Chris Ramsey, chair of the SPP Defined Benefit Committee, said: “Care is needed to make sure the risk that some schemes enter the PPF when they could have secured a higher benefit in the open market is minimised.”
The SPP said in its consultation response that the range of pricing experienced in the market “can be wide and sometimes much cheaper than expected”, arguing that market capacity at the time a scheme approaches the market could be a more significant factor in determining price than scheme size.
“The choice of a discount rate is therefore a difficult judgment to make, especially given the implications could be significant for member,” it noted.
The implications are that scheme members might end up in the PPF, where a haircut is applied to pensions not yet in payment, without needing to.
The SPP said: “There is a risk that the proposed change in approach could lead to circumstances where schemes enter the PPF when they could otherwise have secured a higher benefit in the market.”
Do you agree that care needs to be taken with bespoke discount rates, to ensure small schemes don’t miss out on buyout?
