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The Actuary The magazine of the Institute & Faculty of Actuaries

The last valuation

As defined benefit pension scheme
actuaries will be familiar with the
Pension Protection Fund (PPF)
section 179 ‘levy’ valuation, as
all but newly established schemes must submit
their first such valuation by 31 March 2008.
However, for schemes where the employer has
recently become insolvent there is a further PPF
valuation for the actuary to carry out. This article
looks at the actuary’s part of the postinsolvency
process and, will be of particular
interest to those carrying out their scheme’s
final valuation.
The assessment period
The assessment period usually begins at the date
of the insolvency event. The PPF aims to complete
assessment periods within two years.
During the assessment period the trustees
continue to run the scheme and reduce benefit
payments to the level of PPF compensation; for
example, reducing the benefits of pensioners
below normal pension age to a 90% level of
The trustees will also commence an exercise
to validate the completeness and accuracy of
membership information held. Once this is
complete work can start on the actuarial valuation,
which will decide whether or not the
scheme enters the PPF at the end of the assessment
period. Only if the valuation shows that
on the day before the insolvency event the
assets were less than protected liabilities will the
PPF assume responsibility for the scheme.
Otherwise the scheme trustees will have the
opportunity to wind up outside of the PPF.
Section 143
The valuation is known as a section 143 valuation
after the part of the Pensions Act 2004 (the
Act) that requires the PPF to obtain the calculation.
The PPF chooses which actuary carries
out the work, usually the scheme actuary.
The valuation must comply with legislation
and PPF guidance, with which the actuary
needs to be familiar. The following are of particular
importance: schedule 7 of the Act, which
describes how compensation is calculated; the
Valuation Regulations SI 2005/672; and the
two guidance documents on the PPF website,
one describing the calculation methodology
and reporting requirements, the other the valuation
The assets must be based on audited accounts. Regulation 7 of the Valuation Regulations sets
out specific cases where this audited asset value
must be adjusted. Common adjustments include
those for insurance policies and for recoveries
relating to the section 75 debt.
The assumptions target the cost of securing PPF
compensation with an insurance company. In
practice insurance companies use more sophisticated
assumptions than are specified for
section 143 valuations. The assumptions are
therefore intended to err on the side of understating
buyout cost. This gives borderline
schemes the opportunity to secure benefits in
excess of PPF compensation from an insurer.
The section 143 liability calculation is a more
complex undertaking than the levy valuation.
For example, prudent approximations are not
permitted and actual PPF compensation must
be valued, whereas section 179 valuations are
based on scheme benefits subject to certain
adjustments, and prudent approximations can
be made.
The calculation will also differ from the previous
funding valuation of the scheme. One of
the features of compensation likely to make the
calculations different is ‘tranching’. A typical
example is the ‘Barber window’ that many
schemes adopted in their benefit structure to
comply with sex equalisation legislation. In such
schemes compensation accrued before, during
and after the window period is payable from different
normal pension ages. Compensation
must be valued as coming into payment at the
normal pension age relevant to each tranche,
whereas for the previous funding valuation it
was probably assumed that members took all of
their benefits at a single retirement date.
Legislation and guidance is specific about the
minimum level of information contained in
the report and the wording of the actuary’s
Once the actuary has completed the calculations
and prepared a draft report, it is emailed
to the PPF with a spreadsheet containing data
and a liability summary using the template on
the PPF website. The PPF Actuarial Team checks
the report and calculations for compliance with
legislation and guidance. Section 144 of the Act
requires the PPF to be satisfied the valuation is
compliant with the regulatory requirements
before it can issue its approval, so there are
broader considerations than simply whether
the scheme’s funding level is above or below
100%. Any questions or necessary changes are
communicated to the actuary for resolution in
a further draft of the report.
When the PPF Actuarial Team is able to recommend
the report and calculations to the board
as compliant, the actuary is sent a request for
the final valuation and certificate. The board’s
approval is communicated to the trustees once
it has been formally granted, and underfunded
schemes will then transfer to the PPF a few
months later. Workshop
The PPF is grateful to those actuaries who help
with this important task and is holding a workshop
in London on the afternoon of 23 January for actuaries
keen to learn more about section 143 valuations.
If you are interested in attending, please
email Linda.cordery@ppf.gsi.gov.uk.