Pope Anderson LLP

Transfer values

New Regulations Published

The Occupational Pension Schemes (Transfer Values) Regulations 2008 have been published and are due to come into force on 1 October 2008.

The Regulations establish new arrangements for the calculation and verification of Transfer Values, and withdraw the mandatory Guidance Note (GN11), which was previously used by the actuarial profession to determine transfer values. This signifies a shift in the balance of responsibility to the Trustee, though the overall approach taken largely remains the same.

Key features in the Regulations include:

• Trustee responsibility, on actuarial advice, for setting the assumptions used to calculate the Transfer Value;
• The calculation, which takes into account members’ accrued benefits, available options and any discretionary benefits;
• A procedure for calculating the minimum basis for Transfer Values;
• Increased disclosure obligations to members considering a transfer;
• The ability to reduce Transfer Values to reflect scheme underfunding.

The Pensions Regulator delays longevity trigger

In March 2008 the Pensions Regulator published a consultation document setting out how it intends to regulate the mortality assumptions adopted for scheme funding valuations. This set out a number of best practice guidelines for trustees to follow including:

• Mortality assumption to be evidenced based and clearly and transparently described.
• Trustees adopt the terminology recommended by the actuarial profession to aid transparency and understanding.
• Trustees to note the developments in knowledge on trends in mortality, with some projections in common use no longer likely to be considered reasonable.
• Two separate assumptions needed namely, the baseline table for the current rates of mortality and the allowance for future improvements.
• Individual schemes will not normally have the evidence to make a scheme specific allowance for future improvement and will need to use broader data.
• The Regulator considers that an adjustment to the discount rate as a proxy for future improvements does not meet the statutory requirement to adopt a prudent mortality assumption or achieve good practise in clarity.

The consultation paper also included a new funding ‘trigger’ based on the mortality projection assumption. The Regulator suggested that schemes which do not assume that mortality improvement will be at least fast as the ‘long cohort projection basis with a 1% underpin’ would attract greater scrutiny. This trigger was to apply for all valuations after March 2007.

In July 2008 the Regulator issued a press release announcing that the changes to the way longevity is treated in the new scheme funding regime will be delayed and will now only apply for valuations after September 2008.

Our concern with funding triggers is that they encourage herd like behaviour and can become minimum funding standards, even if the Regulator says they are not intended to be. Trustees have already been asking for valuation results on a long cohort minimum 1% mortality projection basis.

We also have concerns with trigger itself which is based on one, extreme view on how mortality rates will develop in the future. It assumes that mortality will improve at a faster rate than most trustees have hitherto been assuming.

We welcome the Regulator’s decision to postpone the way it will treat longevity, although in practice this will have little practical effect (almost all schemes with valuation dates after March 2007 would have been triggered and the Regulator was never going to ask all these schemes to redo their valuations).

The PPF announces the 2009/09 levy scaling factors

On 30 May 2008 the Board of the Pensions Protection Fund announced the risk-based scaling factor and scheme based levy multiplier that will be used to calculate the pension protection levies for 2008/09. This makes it possible for schemes to calculate their 2008/09 PPF levies with accuracy.

• The risk-based levy scaling factor for 2008/09 has been set at 3.77. In December 2007 the PPF had announced that it expected the 2008/09 risk based factor to be 1.60.

This means that, all other things being equal, many schemes will find that their risk based levies will be 2.36 times higher than they had previously estimated!

• The scheme based levy multiplier for 2008/09 has been set at 0.0165%. In December 2007 the PPF announced that it expected this to be 0.0152%.

Schemes will then find that their scheme based levy is 9% higher than previously estimated!

It seems the PPF underestimated the efforts made by levy payers to improve the funding and risk level of pension schemes. The increase to a risk-based factor of 3.77 and the corresponding increase in levies payable will be a disappointment for many levy payers whose budgets will be blown off course by such a large movement in the goalposts.

Update on the Financial Assistance Scheme

The Financial Assistance Scheme (FAS) was originally established to provide assistance to those whose pensions were curtailed following the insolvency of the employer, but were not eligible for entry to the Pension Protection Fund.

Successive amendments to FAS in 2007 and 2008 have increased the scope and benefits provided. The FAS will now provide assistance to people who lost out on scheme pension where the scheme entered wind-up between 1 January 1997 and 5 April 2007 and the principal employer:

• Was insolvent and unable to pay the employer debt.
• Was Solvent on wind-up and paid the employer debt in full but this was insufficient to secure members benefits in full. (The reason for this being that the legislative requirements at the time did not require that employers winding-up their schemes make good the full buy-out debt).
• Entered into a compromise agreement with the trustees where enforcing the debt in full would have pushed the employer into insolvency.

The FAS will provide benefits equal to the 90% of the expected scheme pension subject to a cap of £26,000 (the cap will be increased in future years). Pensions accrued after 5 April 1997 will be increased in line with the retail price index subject to a cap of 2.5% p.a. Financial assistance will begin at NRD, or age 60 if later higher (earlier payment will is possible for those unable to work because of ill health). A tax free lump sum is payable, up the value of the member’s entitlement in the scheme.

Finalised Regulator guidance on wind-ups

In June 2008 the Regulator issued its final good practice guidelines on winding up occupational pension schemes. Some of the key points are:

• Schemes already in wind-up should complete the key activities as soon as possible and within two years.
• Schemes commencing wind-up should complete at least the key activities within two years.
• To avoid unreasonable delays the Regulator encourages trustees to a adapt a pragmatic and proportionate approach whilst working in line with the provisions of the trust deed and rules and legislative requirements.
• The Regulator encourages the parties to have in place a project plan to ensure the two year time frame can be achieved.
• The Regulator advises that the process of reconciling contracted out liabilities is amongst the first activities undertaken in the wind-up process.

The key activities are:

• Serving a debt on the employer.
• Securing pensioner benefits.
• Identifying the non-pensioner share of assets and obtaining terms from an insurer to secure a guaranteed pension.
• Conducting a final actuarial valuation.
• Issuing option letters to non-pensioners or details of insured benefits as appropriate.