PPF pushes ahead with changes to valuation assumptions for buyout

The Pension Protection Fund (PPF) has confirmed that it will push ahead with its proposals to change the assumptions it uses for certain valuations that provide an estimate price for bulk annuity providers in the buyout market.

In its consultation response, the pensions lifeboat said that the update valuation assumptions will reflect lower pricing in the bulk annuity market.

The changes aim to ensure that schemes that may be able to secure benefits above PPF levels are given the opportunity to test the market.

The new assumptions will take effect from 1 May 2023 and updated guidance documents have been published by the PPF.

Following industry feedback, the PPF decided against introducing the updates from 1 April 2023, as it would have meant valuations with an effective date of 31 March and 5 April would be carried out on the different sets of assumptions.

As part of the changes, the PPF will adopt a yield curve approach when assessing schemes for entry into the PPF under section 143 of the Pensions Act 2004.

The pension lifeboat hopes that this approach will place a more accurate value on liabilities.

However, valuations carried out for levy purposes under section 179 will not be moved to this more complex approach, the PPF stated.

Other changes include increasing the discount rate for certain types of benefits, moving to the latest morality projections model, and amending the calculation of expenses.

The PPF said that the combined impact for almost all schemes would be a reduction in the assessed value of scheme liabilities.

Commenting on the announcement, PPF chief finance officer and chief actuary, Lisa McCrory, said: “We are pleased to announce that we will be updating the valuation assumptions to ensure that those schemes that have sufficient assets to secure benefits above PPF levels when their employer becomes insolvent are given the opportunity to test the market.

“There was general agreement that bulk annuity prices had altered sufficiently enough to merit a change to the assumptions, and there was also strong support for the move to a yield curve approach for section 143 valuations.

“We are very grateful to all those who took the time to respond to our consultation and would like to thank those who helped shape the proposals.”

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