Introduction
The PPF is aiming to simplify the process of assuming responsibility for schemes in assessment. Until now, it has been necessary for an actuary to undertake a detailed valuation of a scheme’s assets and liabilities under section 143 of the Pensions Act 2004 (“a section 143 valuation”) in order to establish that a scheme has insufficient assets to meet its protected liabilities. However, many schemes are underfunded (or indeed overfunded) to such an extent that the section 143 valuation does no more than state the obvious. The Pension Protection Fund (Miscellaneous Amendments) Regulations 2012 make it possible for the PPF to use a funding determination instead of a section 143 valuation for such schemes.
A further measure relates to schemes which, under the section 143 valuation, appear to have sufficient assets to secure benefits that are greater than would be provided under the PPF but which find that they are, in fact, unable to secure such greater benefits in the market. In future such schemes will be able to apply for a reconsideration under section 151 of the Pensions Act 2004.
Funding Determinations
The new procedure is that, for schemes that appear to the PPF to be significantly overfunded or underfunded, the PPF will seek to make a Funding Determination instead of commissioning a detailed valuation under section 143. To assist the Determination, the PPF will request an Estimate of the value of the protected liabilities and the assets from the scheme trustees. If the Funding Determination shows that the assets are insufficient to secure the protected liabilities, the PPF will assume responsibility for the scheme.
The Estimate will be based on a recent section 179 valuation (the section 179 valuation is provided on a regular basis by the Scheme Actuary to enable the PPF to calculate the scheme’s levy) or a recent valuation carried out for another purpose. An actuary will be required to certify that, had a section 143 valuation been carried out, the assets are unlikely to have been either less than (overfunded schemes) or more than (underfunded schemes) 100% of the protected liabilities.
The PPF’s decision as to whether to use a Funding Determination or commission a section 143 valuation will be made based on its assessment of existing section 179 valuations that have been submitted to it. For schemes that are expected to be very overfunded, the PPF will seek confirmation that the scheme is likely to be able to buy out its protected liabilities with an insurance company. In the absence of such confirmation, the PPF will commission a section 143 valuation in the normal way.
The power to make a Funding Determination will not apply to all multi-employer schemes, only
- single employer sections and last-man-standing sections of sectionalised schemes and
- last-man-standing non-segregating schemes.
The PPF will take certain further matters into account when making a Funding Determination, for example the likelihood of recoveries from the insolvency practitioner.
The rules on reconsideration
The former rules on reconsideration required the trustees to obtain a Protected Benefits Quotation from an insurer before they could make a Reconsideration Application. The new changes to legislation allow trustees to apply for reconsideration where
- they can show that, despite having taken all reasonable steps to obtain a Protected Benefits Quotation they have been unable to do so and
- the PPF is satisfied that, at the time of reconsideration, the assets are less than the value of the protected liabilities.
If a section 143 valuation or a Funding Determination has shown a funding level of over 100% and the trustees apply for reconsideration they must also apply for authority to continue as a closed scheme.
Comment
We welcome the PPF’s initiative, which should reduce both the time that schemes spend in assessment and the costs (borne by the PPF and so, ultimately, through the levies paid by all “live” defined benefit schemes) incurred during assessment. We hope that they will continue to monitor progress and make further improvements to their procedures where these can be shown to reduce costs and increase efficiency further.