© The Pension Protection Fund An Actuary’s Role Kulin Patel and Martin Hooper Higham Group 29 November 2005

© Agenda Background to Occupational Pensions in UK Security of Occupational Pensions The Pension Protection Fund Where actuarial students and actuaries fit in

© Occupational Pensions in UK Retirement Savings in the UK  Based on a 3 tier system  Turner report Employers have set up pension schemes  Tax incentives on contributions  Part of Reward and HR Strategy Incentives to interact with State Pensions

© Occupational Pensions in UK Employer schemes  Defined Benefit  Defined Contribution  Hybrid Defined Benefit Schemes  Many rules and regulations  Employers must fund for the future promises

© Security of Defined Benefit Schemes What happens if the Employer ceases? Pension scheme assets are held separately In most cases the scheme winds up Scheme assets need to be distributed  Scheme rules would specify method  Including the priorities of members

© Security of Defined Benefit Schemes What happens if the scheme has a shortfall? Benefits have to be reduced when assets distributed There was no legislation covering this scenario Pensions Act 1995 (effective from 6 April 1997) changed this

© Security of Defined Benefit Schemes Pensions Act 1995  Minimum Funding Requirement  Debt on Employer  Statutory Priorities for distribution of assets 1.AVCs 2.Pensioners 3.Deferreds 4.Pension Increases

© Security of Defined Benefit Schemes Since Pensions Act 1995  Schemes have had large shortfalls  Measurement of Debt on Employer discredited  Employers unable to pay deficit off  Benefits have been reduced by large amounts  Low confidence in defined benefit provision

© Pension Protection Fund (“PPF”) Introduced by Pensions Act 2004 Designed to provide members of defined benefit schemes a level of protection on employer insolvency Pensions Act and Regulations stipulate  Powers and responsibilities of the PPF  Details of PPF compensation  Process by which a scheme enters the PPF  How PPF will be funded

© Pension Protection Fund Assessment Period Compensation Levels PPF Levies

© Overview of the Assessment Period Qualifying insolvency event for an eligible pension scheme Pension scheme continues/ winds up outside the Pension Protection Fund Pension scheme rescue has occurred Pension scheme rescue not possible Assessment period ends Pension Protection Fund obtains actuarial valuation Assets > protected liabilities Assessment period ends Pension scheme winds up outside the Pension Protection Fund Assets < protected liabilities Assessment period ends Pension scheme enters the Pension Protection Fund

© Compensation Levels Over NPA at Insolvency Event (IE)? Yes 100% current entitlement No Cap at £27,778 pa Scale back to 90%

© Compensation Levels (2) Schedule 7 Pensions in payment:  Early retirements  Ill-health  Survivors Pensions not in payment:  Revalue to IE (existing regime)  Revalue from IE at LPI (5%)  Test against Cap, reduce to 90% (Unless over NPA at IE)

© Compensation Levels (3) Escalation in payment  LPI (2.5%) on post 97 tranche only Death benefits  Provision for death benefits  DAR: 50% post commutation  DID: 50% re-valued to death Other benefits  Commutation: Up to 25% of pension  Early / late retirement: Reduce to PPF level  Ill health retirement: Not allowed

© PPF Levies PPF needs to raise capital (est. £300m p.a.) Levy on all eligible schemes From 2006/07 PPF to take risk based approach  Scheme financial position on PPF basis  Probability of employer insolvency  Combined in a formulae to determine the levy

© PPF Levies Scheme financial position  Section 179 Valuation Probability of employer insolvency  Risk assessments commissioned by PPF

© PPF and the Actuary Section 179 Valuation  Market value of assets  Adjustments made to scheme benefits for PPF compensation Section 143 Valuation  Market Value of assets plus future recoveries from debt on employer  Actual PPF benefits valued

© PPF and the Actuary During the Assessment Period  Strategic investment advice  Debt on Employer valuation  Advice on scheme benefit adjustments  Consulting advice during the assessment period

© Questions ?