On the go: Almost 300 schemes could see their deficits transformed into surpluses after the Pension Protection Fund announced its decision to press ahead with changes to actuarial assumptions.
There are concerns, however, that the changes could result in higher levy payments for smaller schemes.
The assumptions being changed underlie section 143 valuations, which are used for assessments, and section 179 valuations, which are used in levy calculations.
The change is the culmination of a consultation, launched in February by the PPF, looking into the need to update mortality assumptions in particular in order to reflect pricing in the bulk annuity market.
In response to the calculation, the PPF has confirmed its intention to press on with adopting the latest “S3” mortality series.
It will also adopt the 2019 version of the Continuous Mortality Investigation’s model for the projection of mortality improvements, while amending components of the post-retirement, post-97 discount rates “to better reflect current consumer price index pricing”.
Additionally, the formula for calculating wind-up expenses will be changed, “resulting in an increase to expenses for smaller schemes and a decrease to expenses for larger schemes so they are capped at £3m”.
Finally, there is to be a slight reduction in benefit installation and payment expenses.
The only change to the proposals put to consultation in February concerns the mortality assumptions for section 143 valuations, which have been amended “to better reflect the original construction of the S3 tables”, though it notes that “this will only impact schemes with very high earners and these schemes can request bespoke scheme-specific mortality assumptions if necessary”.
The PPF noted the “generally positive” response to the proposed changes, which are due to come into force on or after May 1 this year.
In particular, it highlighted the five respondents that “explicitly agreed that the proposed wind-up expenses better reflect the larger relative costs experienced by smaller schemes”.
“The proposed cap on expenses was an area of discussion, with one respondent indicating £3m was an appropriate level, but two indicating it might be too low when considering projects like [guaranteed minimum pensions] equalisation and in circumstances where complex issues arise,” the PPF said.
“One respondent was concerned about the impact the change would have on the distribution of the levy, in particular they noted this will result in higher levy bills for smaller schemes.”
The PPF furnished no update to the estimate it made at the time the consultation went out, which was that 261 defined benefit schemes would move from deficit to surplus as a result of the change.
The aggregate section 179 funding ratio, as tracked by the PPF 7800, was expected to improve from 93.5 per cent to 97.6 per cent with this change.
