Out-of-cycle valuations could cut DB scheme PPF levy bills in half

Defined benefit (DB) pension schemes with a 2020 triennial valuation could make “significant” savings on the Pension Protection Fund (PPF) levy by updating their valuation this year, Hymans Robertson has said.

The firm warned that schemes with a 2020 triennial valuation are particularly at risk from having to pay higher PPF levies than needed in 2022, as their current valuation is from 31 March 2020 when asset prices were depressed amid Covid-19 volatility.

In light of this, Hymans Robertson head of corporate DB, Alistair Russell-Smith, suggested that DB schemes with a 31 March 2020 valuation should consider an out-of-cycle s179 PPF valuation at 31 March 2021 to reduce the levies.

Indeed, analysis from the firm suggested that the levy savings for one £1bn scheme that is in levy band 4 with a 90 per cent PPF funding level could half its PPF levy from £300,000 to £150,000 if it completed the out-of-cycle valuation.

Russell-Smith explained: “Schemes that fall into this category had a valuation around the time when asset markets were depressed due to the global pandemic. Assets have subsequently recovered, but this is not fully captured by the PPF’s simplified roll forward approach.

“For example, the PPF’s methodology doesn’t allow for credit spreads so any subsequent recovery of corporate bond holdings won’t be captured.

“An out of cycle valuation captures asset gains since 31 March 2020 that are not caught by the PPF’s more simplified roll forward approach, thereby reducing levies."

He also suggested that this is "particularly beneficial" to those that have high allocations to equities and corporate bonds, as both of these could have seen significantly stronger returns than the PPF would assume in their calculations.

“A common misconception is that you need to do a full actuarial valuation for an out-of-cycle valuation. You don’t; often, these aspects can be explored with minimal time and effort compared to the potential savings," he clarified.

“Approximate methods can be used so long as the scheme actuary can certify that, in their view, the liabilities have not been understated. It needn’t, therefore, be a time consuming and costly exercise."

However, Russell-Smith clarified that audited scheme accounts will be needed, which can limit the number of potential valuation dates, urging sponsors to therefore take action well before the usual 31 March 2022 deadline in light of this.

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