Section 143 FAQs
Actuaries who are undertaking a scheme valuation in accordance with section 143 of the Pensions Act 2004 should refer to the relevant guidance in our Valuation Guidance section. Additional FAQs that arise on this issue will be posted on this page
When will the new s143 assumptions come into force?
The new assumptions (version B3) are to be used for s143 valuations with an effective date on or after 31 March 2008.
What assumptions do I use if my s143 valuation has an effective date on or before 30 March 2008?
If your valuation has an effective date on or before 30 March 2008 you should continue to use the previous assumptions.
The assumptions in the section 143 valuation guidance implicitly allow for increases to be granted to benefits between the relevant date and normal pension age. Is this correct in the case of unrevalued career average schemes? (added 3/1/2006)
Yes. As for Section 179 valuations, for Section 143 purposes deferred increases will be applied to unrevalued career average schemes in the same way as they would for other eligible schemes.
How do I allow for the compensation cap when valuing the protected liabilities for a section 143 valuation where a non-pensioner has tranches of compensation with different NPAs? (updated 6/8/2007)
Where a member has tranches of benefit with different NPAs, the compensation cap needs to be projected to each NPA using the assumption that the compensation cap will increase by a certain percentage in excess of limited price indexation per annum. (The appropriate percentage is detailed in our s143 valuation guidance. This calculation assumes an excess increase of 1.5% p.a. which is the assumption stated in paragraph 5.5 of version H2 of the s143 valuation guidance issued in September 2006.) The aggregate percentage of compensation cap used then needs to be calculated at each subsequent NPA and compensation restricted if the aggregate percentage used exceeds 100%. Once the aggregate percentage used has exceeded 100%, no compensation is payable in respect of any tranches with later NPAs. To do this accurately has the potential for great complexity, particularly where a member has 2 or more NPAs, pre and post 97 compensation and the compensation cap restricting compensation.
Here is an example to illustrate how it should work (using sample values for the compensation cap).
Member aged 50 at assessment date
Scheme benefit at assessment date (£p.a.) of
Tranche A (pre 97) NPA 60 £20,000 p.a.
Tranche B (pre 97) NPA 65 £8,000 p.a.
Tranche B (post 97) NPA 65 £15,000 p.a.
Compensation cap in force at assessment date
For age 60 £25,000 p.a.
For age 65 £29,000 p.a.
Project cap to 60 = 25,000 x 1.015^10 = 29,013.52
Project cap to 65 = 29,000 x 1.015^15 = 36,256.73
% cap used at 60 = 20,000 / 29,013.52 = 68.93%
% cap used at 65 = 68.93% + (8,000 + 15,000)/36,256.73 = 132.37%
Amounts (all as at assessment date) of compensation after application of 90% and compensation cap:
Tranche A (pre 97)
Payable from age 60 up to age 65 (pre 97) = 20,000 x 90% = £18,000.00
Reducing at 65 to 20,000 x 90% / 132.37% = £13,598.25 (care needed here if value using deferred annuity from 65 as no increases apply between 60 and 65)
Tranche B (pre 97)
Payable from age 65 (pre 97) = 8,000 x 90% / 132.37% = £5,439.30
Tranche B (post 97)
Payable from age 65 (post 97) = 15,000 x 90% / 132.37% = £10,198.69
This compensation can then be valued using the net discount rates in deferment as prescribed in the s143 guidance.
The scheme has a practice of allowing members the option on retirement of converting their money purchase AVC fund to a pension paid directly from the scheme’s assets, rather than requiring an annuity to be purchased from an insurance company. How should this AVC pension be treated for the purposes of a s143 valuation? (added 11/4/2007)
In general, provided the terms of conversion of the AVC fund into pension are applied at the date of retirement, the AVC pension continues to be classed as a money purchase benefit once in payment. In this case, the AVC pension should not be included in the protected liabilities and a corresponding deduction should be made from the scheme assets based on the estimated cost of purchasing an annuity to secure the AVC pension in the market. If you are unclear as to whether a particular AVC pension should be classed as money purchase or defined benefit, you should consult your caseworker.
We are in the processing of preparing a draft s143 valuation for the purpose of determining the level of funding. What is the relevant time for the purposes of the date at which the valuation must be prepared? (added 14/11/2007)
Sections 127(4)(b) and 128(3)(b) of the Pensions Act 2004 define ‘relevant time’ as the time immediately before the qualifying insolvency event. We therefore require accounts and valuations to be prepared up to the close of play the day before the date of the qualifying insolvency event.
Where the insolvency event occurs on a Monday or after a Bank Holiday, the accounts or valuation should be prepared to close of play the day before, even if this is not a business day.
The market indices used to determine the financial assumptions for the purposes of the valuation should be based on close of business on the day before the date of the qualifying insolvency date. Where market indices are not published for that date, those for close of business on the latest available prior date should be used.
The PPF assumptions guidance derives the discount rates from yields taken from the “FTSE Actuaries’ Government Securities” series of indices. Are these the same as the “FTSE UK Gilts” indices as printed in the Financial Times? (added 23/5/2008)
Yes, these are the same indices. These indices are part of the FTSE family of indices, and are formally known as the “FTSE Actuaries Bond Indices for British Government Securities”. They are currently printed in the Financial Times under the heading “FTSE UK Gilts”, and are listed on the Institute and Faculty of Actuaries’ website under the same name.
In your section 143 / 179 assumptions guidance you stipulate that the PCMA00 and PCFA00 tables should be used for mortality before retirement. Is this appropriate given that below age 50 the mortality rates in these tables relate primarily to the experience of ill-health pensioners? Should not PNMA00 and PNFA00 be used instead? (added 27/5/2008)
In our view the Combined (C) tables somewhat overstate the mortality of pension scheme members before retirement and the “at or over Normal Retirement age” (N) tables would somewhat understate it, partly owing to the fact that below age 65 the rates in the N tables are derived by blending the graduation into the assured lives table. Our analysis indicates that there is little difference (usually less than 1% in the overall funding level) between using the C tables and the N tables in deferment. We have come down in favour of the C tables rather than the N tables because the C tables would give the lower s143 liabilities figure, and one of the principles underlying the selection of the section 143 assumptions is erring on the side of understating the liabilities in circumstances where there is a range of possible answers for a scheme. The effect of this principle is that schemes whose section 143 valuation funding level is close to 100% have a slightly greater chance of being able to test the buy-out market to see if they can buy out better than PPF levels of benefits.
Your section 143/179 assumptions guidance sets out that the PCMA00 and PCFA00 mortality tables should be used in deferment. These tables derive from the CMI’s Working Paper 22 (WP22) and these started at age 50. These tables were subsequently extended to ages beneath 50 in WP26, although this paper was not formally adopted by the profession. Please could you confirm that it is the extension shown in WP26 that you intend to be used? (added 27/5/2008)
Yes, the mortality rates shown in WP26 should be used beneath age 50.
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