The Pension Protection Fund (PPF) has launched a consultation on plans to use a bespoke discount rate in s143 valuations for smaller schemes, in a move that aims to provide additional flexibility and better reflect buyout pricing for smaller schemes.

An S143 valuation is needed when a scheme’s employer becomes insolvent, triggering the entry of an eligible defined benefit (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.

Actuaries use a number of assumptions when undertaking these valuations, including a prescribed discount rate assumption.

However, the PPF noted that whilst this assumption can provide an accurate estimate of the price of securing PPF benefits with an insurer for larger schemes, the relative price for smaller schemes to secure an insurance buy-out is typically higher.

Given this, it argued that the use of a standard discount rate is therefore underestimating the buyout price for these schemes.

The PPF also revealed that 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.

Under the new plans, the PPF is therefore 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.

These changes aim to provide additional flexibility and the ability for s143 valuations to better reflect buy-out pricing for smaller schemes, while minimising disruption and additional burden on actuaries and the schemes they advise.

Commenting on the changes, PPF chief actuary and interim chief finance officer, Shalin Bhagwan, said: “For smaller schemes that enter our assessment period, our current assumptions are likely to be understating their liabilities. This means marginally overfunded smaller schemes typically exit PPF assessment to pursue deals with buyout providers.

“However, due to their size and being only marginally overfunded, they often can’t get an affordable buy-out quotation for even PPF levels of compensation,” he added.

“This results in additional administrative costs as they run on as closed schemes looking for buy-out solutions. After all options have been exhausted, the schemes often wind up back at the PPF. This can be a prolonged and costly experience for both the trustees and members.

“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.”

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

The lifeboat confirmed that, 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.

The proposed changes will also not impact s179 valuations.

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