The Pension Protection Fund (PPF) is consulting on changes to the actuarial assumptions it uses in valuations in a bid to better reflect the bulk annuity market, with schemes set to move into surplus on aggregate.
The lifeboat fund is required by law to update the s143 and s179 valuation methods to correlate with bulk annuity pricing. The s143 valuation calculates whether a scheme should enter the PPF following an insolvency event, whilst s179 calculates scheme underfunding to determine the amount of levy payable.
After discussions with seven of the eight active pension insurers, the PPF is proposing to update its calculations to use the CMI 2016 model for mortality improvements, adopting the "optimistic" core with a smoothing parameter, thereby reflecting lower buyout prices.
The lifeboat fund had found the differences between buyout pricing and its s143 basis were "material enough to merit amending the assumptions", noting higher mortality experience, a wider range of Consumer Prices Index-linked (CPI) assets, and a higher allocation to alternative assets.
It said this was particularly true for non-pensioner members, and so it plans to increase the pre-retirement discount rate for pre-2009 accruals by 20 basis points (bps). For pensioner members, it will adjust discount rates by 10bps or 20bps.
Overall, the PPF anticipates post-1997 and pre-1997 pensioner liabilities would fall by 4.1% and 2.2% respectively, while post-1997, pre-1997 and post-2009 non-pensioner liabilities would decrease by 7%, 6.6% and 4.2%.
If the assumptions were applied for the lifeboat fund's June figures, schemes would move from being 94.9% funded on aggregate to 100.2% funded, with an additional 445 schemes moving into surplus.
In its update for July, published today, the PPF said funding levels had improved even further, pushing the potential surplus under an adapted model higher.
JLT Employee Benefits director Charles Cowling said schemes would welcome the shift in assumptions, helping them move towards "escaping the millstone of pension deficits around the necks of UK companies".
"JLT welcomes the proposed updates to PPF calculation assumptions," he said. "They reflect changes in the market as a result of the latest information on longevity and also increasing CPI investment opportunities.
"The improvement of around 5% in PPF funding positions will be welcomed by companies and trustees alike as it will take some of the pressure off negotiations on 2018 valuation assumptions."
The consultation is open until 21 September, with the PPF planning to put the changes into effect from 1 October.
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