By David Piltz, EMEA Consulting and Market Leader
Autumn is a season of change and the Pension Protection Fund is certainly embracing that sentiment.
The Pension Protection Fund (PPF) has, in recent years, received a number of comments on the level of compensation (and comparative fairness from one member to another) that it provides when a pension scheme tips into its safety net. Steve Webb (previous pensions minister) proposed, in 2013, an increase to the compensation cap for longer-serving employees. The intention had been to bring this into legislation in the 2014 Pensions Act. However, this was delayed due to legislative complications. Many would argue that the bigger inequality is between members over their normal pension age and those below as only members under their normal pension age are capped.
The government has now announced that it will introduce the required legislation to allow this change to come into effect in April 2017 and has launched an eight-week consultation on the draft regulations required.
With the PPF compensation cap currently sitting at £33,678 (after application of the 90% cap), the intention is to add 3% onto that cap for every year of service over 20 years an employee has within their pension scheme (subject to a maximum cap of twice the standard cap). This is intended to be fairer to those long-serving employees on modest earnings caught by the cap, when compared to short-serving high-earning employees also caught by the cap.
While this will be good news to some pension scheme members, this presumably means the measurement of liabilities for Pension Protection Levy purposes will change in the near future to allow for this increased level of compensation. For some schemes this increase in liability (and hence Pension Protection Levy) could be significant, depending on the service history of its members. A resulting shift in cross-subsidy of the overall annual risk based element of the Pension Protection Levy from one scheme to another is inevitable. This will create a number of winners and losers, placing more strain on some schemes at a time when funding deficits are at historical highs.
This is not the only announcement from the PPF. The PPF has also commenced a consultation on changes to the section 143 and section 179 PPF valuation assumptions following feedback from insurers who price annuity business. The main proposed changes are:
- A weakening of the mortality assumptions
- Changes to the discount rates to allow for more duration-appropriate yields to be used (including the use of separate yields for pensioners and non-pensioners)
Overall, the PPF expects this to result in a reduction in liabilities on the bases mentioned above, which will be some welcome news to those schemes seeing increases resulting from the compensation cap change.
With the PPF also due to announce its draft 2017/18 PPF Levy determination imminently and the upcoming next triennium consultation due later in the year or early 2017, the PPF is set for a long Winter of change.