The Pension Protection Fund (PPF) has confirmed that marginally overfunded defined benefit (DB) schemes with less than £50m in liabilities will now have the option to use bespoke discount rate for section 143 (s143) valuations.

The PPF previously held a consultation on its latest s143 valuation assumptions, which outlined proposals to allow marginally overfunded smaller schemes to use a bespoke discount rate for certain valuations during the assessment period.

An S143 valuation is needed when a scheme’s employer becomes insolvent, triggering the entry of an eligible DB scheme into a PPF assessment period, to assess if the scheme can secure benefits with an insurer at or above the levels provided by the PPF.

However, for smaller schemes, currently considered to be those with less than £50m in s143 liabilities, using a standard discount rate is underestimating the buyout price for these schemes.

This, according to the PPF, leads to marginally overfunded smaller schemes entering the buyout market, often struggling to receive affordable buyout quotes, and usually running on as closed schemes before re-entering the PPF.

In light of this, the PPF proposed plans 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's response to the consultation revealed that industry respondents were also in general agreement about the proposals, although they stressed the need for care to avoid the risk of a scheme transferring to the PPF when it could have secured benefits better than PPF compensation in the insurance or consolidator market.

Following industry responses, the lifeboat confirmed that it will introducing bespoke discount rate for smaller marginally overfunded schemes, in a move that is expected to help cut “unnecessary” costs and shorten the time it takes for these schemes to transfer into the PPF.

Previously, the PPF only permitted actuaries to use bespoke s143 assumptions for mortality, some other demographic assumptions, and expenses, where there is sufficient evidence to justify them.

However, following discussions with six bulk annuity providers and eight PPF-panel trustee and advisory firms, the PPF concluded that otherwise the current standard assumptions generally remain appropriate.

Commenting on the response, PPF chief actuary, Shalin Bhagwan, said: “We would like to thank all those who took the time to respond, as well as the insurance companies and PPF panel firms who helped us shape the proposals.

“By introducing this bespoke discount rate for smaller marginally overfunded schemes, we’ll be able to reduce unnecessary costs and shorten the time it takes for these schemes to transfer into the PPF and find a secure home for members.”

Due to restrictions placed on public bodies during the pre-election period, the publication of the full consultation response was delayed, however, the PPF confirmed that the new assumptions guidance took effect from 31 May 2024.

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