PPF consults on bespoke s143 discount rates for small schemes

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The Pension Protection Fund is consulting 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. The consultation closes on 6 May.  

The PPF is now proposing to allow actuaries to use a bespoke discount rate assumption when conducting a s143 valuation of schemes with liabilities of less than around £50m.  

The PPF has said that for larger schemes, the prescribed discount rate leads to an accurate estimate of the price of buyout, but that the relative price for smaller schemes was typically higher and therefore underestimates the buyout price for these schemes. 

“Feedback from marginally overfunded smaller schemes that enter the buyout market has shown they often struggle to receive affordable buyout quotes, and usually run on as closed schemes before re-entering the PPF,” the lifeboat fund revealed.  

“This results in additional administrative costs as they run on as closed schemes looking for buyout solutions. After all options have been exhausted, the schemes often wind up back at the PPF,” said Shalin Bhagwan, chief actuary and interim chief finance officer, adding: “This can be a prolonged and costly experience for both the trustees and members.”  

Bhagwan said: “We hope these proposed changes will have a positive impact on marginally overfunded smaller schemes that enter our assessment period. We look forward to hearing from actuarial professionals and trustees on our consultation proposals.”   

When an employer becomes insolvent, a s143 valuation is carried out during the PPF assessment period by an actuary appointed by the PPF’s board, using prescribed discount rate assumptions. Currently the PPF only permits actuaries to use bespoke s143 assumptions for mortality, some other demographic assumptions, and expenses, where there is evidence to justify them. 

However, the Pensions Act 2004 means the PPF must keep the assumptions used for valuations in line with the estimated price of securing PPF levels of compensation with a bulk annuity provider. 

The PPF also said that, after discussions with six bulk annuity providers and eight PPF-panel trustee and advisory firms, it has concluded that otherwise the current standard assumptions “generally remain appropriate”. 

Actuarial professionals and industry stakeholders can respond to the consultation via AssumptionsConsultation@ppf.co.uk  

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