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The end of the pension scheme-liability management, wind-up and the PPF Lucy Currie

The end of the pension scheme-liability management, wind-up and the PPF Lucy Currie. FAS valuations. Introduction . Background The purpose of FAS valuations Conducting the valuation Post-valuation activities Progress to date. What is the FAS?. 2. Background

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The end of the pension scheme-liability management, wind-up and the PPF Lucy Currie

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  1. The end of the pension scheme-liability management, wind-up and the PPFLucy Currie FAS valuations

  2. Introduction Background The purpose of FAS valuations Conducting the valuation Post-valuation activities Progress to date © 2010 The Actuarial Profession www.actuaries.org.uk

  3. What is the FAS? 2 Background Financial Assistance Scheme originally designed to help those who had suffered significant losses to their pensions as a consequence of employer insolvency Applied to schemes commencing windup between 1 January 1997 and 5 April 2005 Successively extended a number of times, covering more people and offering increased benefits Key FAS promise: 90% of expected pension © 2010 The Actuarial Profession www.actuaries.org.uk

  4. Requirement for the valuation (1) 3 FAS: an overview Some FAS schemes have discharged liabilities by purchasing annuities for all members or have entered binding agreements to do so These are known as “FAS 1 schemes” Members of qualifying schemes which have already completed wind-up by the purchase of annuities (or payment of a transfer value/lump sum) receive a top-up from the FAS to 90% of expected scheme pension Some scheme have not yet fully annuitised. The Young Review recommended that assets of these schemes should be taken in to Government These are known as “FAS 2 schemes” © 2010 The Actuarial Profession www.actuaries.org.uk

  5. Requirement for the valuation (2) 4 The Government, acting on the recommendation of the Young Review, will take in remaining assets of such schemes and make reciprocal Assistance payments to members To do so, a valuation of FAS 2 schemes’ assets and liabilities is required Requirement is set out in regulation 22 of the FAS regulations Regulations came into force on 2 April 2010 © 2010 The Actuarial Profession www.actuaries.org.uk

  6. Purpose of the valuation (1) 5 Why is a valuation required? • Valuation assesses the amount that members of FAS 2 schemes could have received if wind-up had been completed by purchase of annuities • Notional pension: a proxy for the annuity which could have been bought had the scheme wound up outside of FAS • This is derived from each individual's asset share • Asset share is key output of the FAS valuation © 2010 The Actuarial Profession www.actuaries.org.uk

  7. Purpose of the valuation (2) 6 • FAS scheme manager responsible for calculating notional pension • Three key uses of notional pension: • Assessing members’ benefits • Tax-free cash • Reconciliation on transfer © 2010 The Actuarial Profession www.actuaries.org.uk

  8. Purpose of the valuation (3) 7 Assessing members’ benefits In a “normal” windup, some members could have received more than 90% of expected pension Essential to ensure these members not penalised by asset transfer Paid the higher of notional pension and 90% of expected pension Ensures receive full value of asset share © 2010 The Actuarial Profession www.actuaries.org.uk

  9. Purpose of the valuation (4) 8 Paying tax-free cash Some individuals eligible to commute assistance for tax-free cash Limited to value of notional pension Standard HMRC maximum also applies Reconciliation on transfer On transfer to PPF, conduct a reconciliation for each individual Comparison of payments received vs payments due Notional pension is affordable amount during windup © 2010 The Actuarial Profession www.actuaries.org.uk

  10. Purpose of the valuation (5) 9 What is the aim of the valuation? Valuation conducted at “calculation date” Looking back to position at start of windup Liabilities are a combination of past payments due and future expected payments Assets taken from accounts and adjusted for benefit payments Based on market conditions at the calculation date © 2010 The Actuarial Profession www.actuaries.org.uk

  11. Overview of the valuation process (1) 10 © 2010 The Actuarial Profession www.actuaries.org.uk

  12. Overview of the valuation process (2) 11 © 2010 The Actuarial Profession www.actuaries.org.uk

  13. Pre-valuation tasks (1) 12 Actuary’s involvement • Requirement to sign R14 • Traditional windup tasks • AVCs • Annuities © 2010 The Actuarial Profession www.actuaries.org.uk

  14. Pre-valuation tasks (2) Liability * Coverage Policy benefits valued on buyout basis Annuity value Asset share 13 Annuities • Preference is to assign policies to individuals • Only possible where value of policy equals asset share • == • This may not be the case where: • Policy benefits differ from scheme benefits • Liabilities valued on a different basis (MFR vs buyout) • Liabilities not covered in priority order © 2010 The Actuarial Profession www.actuaries.org.uk

  15. Initial vs final valuations (1) 14 Who is included in the initial valuation? • All members who have not had their liabilities fully discharged • Dead members • Partial transfers • Partial winding up lump sums/trivial commutation • Annuitants whose policies are in trustees’ name • Partial annuitants whose policies are in their own name © 2010 The Actuarial Profession www.actuaries.org.uk

  16. Initial vs final valuations (2) 15 Who is included in the final valuation? • Those members where assets in respect of them are transferring to government • FAS 1 members are excluded from the final valuation figures (but included on the template) © 2010 The Actuarial Profession www.actuaries.org.uk

  17. Data (1) 16 Requirements for data: calculating liabilities • Data required for FAS valuations is different to that required for a normal valuation • Ignoring options during windup • Benefits due rather than benefits in payment • Looking back to beginning of windup • Liabilities for dead members © 2010 The Actuarial Profession www.actuaries.org.uk

  18. Data (2) 17 Requirements for data: additional data • We also require the actuary to provide additional data on the template • This is used to calculate notional pensions and includes: • Breakdown of payments made by the scheme during windup • Details on bridging pensions and guarantees • We recommend discussing data requirements well before the valuation is commissioned © 2010 The Actuarial Profession www.actuaries.org.uk

  19. The validation template 18 Why use a template? Learning from the s143 process Built-in checks and audit trail TAS issues Feedback to date © 2010 The Actuarial Profession www.actuaries.org.uk

  20. Post-valuation 19 Benefits FAS scheme manager calculates notional pension Assistance calculated for all eligible individuals Payroll transfers Communications Benefit statement for those already eligible Welcome pack for those yet to reach eligibility © 2010 The Actuarial Profession www.actuaries.org.uk

  21. Notional pensions (1) 20 Types of notional pension • Two types of notional pension: • FAS-shaped • Scheme-shaped • Based on whether “in present payment” on 2 April 2010 • “present payment” defined in regulations • Aims to balance simplicity of administration with preserving members’ expectations © 2010 The Actuarial Profession www.actuaries.org.uk

  22. Notional pensions (2) 21 FAS-shaped notional pensions • FAS benefits i.e. • No indexation pre 97 • LPI 2.5% indexation post 97 • Survivor’s proportion of 50% • No death guarantee © 2010 The Actuarial Profession www.actuaries.org.uk

  23. Notional pensions (3) 22 Scheme-shaped notional pensions • Scheme-shaped in relation to: • Survivor’s proportion • Death guarantee length and payment type • Indexation of LPI 2.5% on the amount affordable • Start by targeting initial scheme benefits • Replicates bridging pensions © 2010 The Actuarial Profession www.actuaries.org.uk

  24. Notional pensions (4) 23 Scheme shaped notional pensions: examples Mr A, a pre windup pensioner, has an asset share of £10,000 His pension at windup was £800 pa The asset share can only buy a non-increasing notional pension of £500 pa Ms B, a post windup pensioner, has an asset share of £50,000 Her pension at date pension due to commence was £2,000 The asset share can buy increases on 20% of the target pension, so she has an increasing notional pension of £400 and a level notional pension of £1,600 © 2010 The Actuarial Profession www.actuaries.org.uk

  25. Notional pensions (5) 24 Scheme shaped notional pensions: examples Mr C, a pre windup pensioner, has an asset share of £100,000 His pension at windup was £3,000 The asset share can buy increases on the whole £3,000, and still have further asset share remaining, so he has a fully increasing notional pension of £4,000 © 2010 The Actuarial Profession www.actuaries.org.uk

  26. Progress to date (1) 25 First valuations commissioned as at 30 April 2010 Commissioned valuations for 56 schemes as of November Two schemes have transferred Aiming to transfer around 100 schemes next financial year © 2010 The Actuarial Profession www.actuaries.org.uk

  27. Progress to date (2) Valuation actuaries’ performance • In general reviewing 2-3 drafts • Have received template where no further drafts required • Template approach appears to be minimising need for rework 26 © 2010 The Actuarial Profession www.actuaries.org.uk

  28. Progress to date (3) Common problems • Problems have arisen as a result of • Data issues being uncovered via valuation • Data issue arising during completion of S1 • Lack of clarity on priority order • Lack of clarity on scheme benefits • Communication with administrators and trustees key 27 © 2010 The Actuarial Profession www.actuaries.org.uk

  29. Further support 28 Training Webinar Training sessions offered to new actuaries Your actuarial contact Named contact for each scheme Website Guidance on valuation and assumptions (DWP) Template and template guidance Trustee guides © 2010 The Actuarial Profession www.actuaries.org.uk

  30. Questions or comments? Expressions of individual views by members of The Actuarial Profession and its staff are encouraged. The views expressed in this presentation are those of the presenter. 29 © 2010 The Actuarial Profession www.actuaries.org.uk

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