Proposed changes to PPF assessment valuations could push smaller funds away from better options in the insurance market, according to the Society of Pension Professionals.
The PPF is currently consulting on changes to section 143, 152 and 156 valuation rules, which govern how pension schemes are assessed for entry into the lifeboat fund.
The changes could introduce flexibilities for actuaries to use bespoke discount rates, which the regulator believes may be better suited to smaller schemes with less than £50m in liabilities.
In its response to the consultation, the SPP said the flexibilities were welcome but warned of a need to ensure members’ interests were put first in all cases.
“The range of pricing experienced in the [insurance] market can be wide and sometimes much cheaper than expected,” the SPP said. “Indeed, market capacity at the time when a scheme approaches the market could be a more significant factor in determining price than scheme sizes.”
The SPP also highlighted that a scheme’s financial position may have changed since it entered PPF assessment, and this also needed to be taken into account.
“The choice of a discount rate is therefore a difficult judgement to make, especially given the implications could be significant for members,” it said. “We therefore advise these flexibilities are only used when there is clear evidence that PPF benefits are not affordable in the insurance market.”
The society urged that all parties involved in an assessment act in members’ best interests to ensure that all options have been considered and schemes are not placed into the PPF unnecessarily.
The flexible discount rate proposal is designed to reflect that smaller schemes usually have to pay a higher premium to secure an insurance buyout. This has meant that the PPF’s standard discount rate was “underestimating the buyout price for these schemes”, according to the lifeboat fund.
Announcing the consultation last month, the PPF said it had received feedback from “marginally overfunded” small schemes that they struggled to source affordable insurance quotes to secure benefits at a higher level than PPF compensation. This often led them to run on for a period before being forced to re-enter PPF assessment.
Shalin Bhagwan, chief actuary and interim chief finance officer at the PPF, said this situation led to additional administrative costs for those schemes running on but unable to buy out.
“This can be a prolonged and costly experience for both the trustees and members,” he said. “We hope these proposed changes will have a positive impact on marginally overfunded smaller schemes that enter our assessment period.”
The consultation is open until 6 May 2024 and is available on the PPF’s website.
Further reading
Superfund Clara takes Debenhams scheme out of PPF (14 March 2024)
PPF updates buyout assumptions (9 January 2023)
