U.K. PPF liability (Section 179)
The Board of the Pension Protection Fund (PPF) is a Statutory Fund in the U.K., created under the Pensions Act 2004 to insure defined benefit pension schemes in the event of insolvency (similar to the PBGC in the United States). Actuaries need to calculate only the PPF liability. The “levies” (insurance premiums) are calculated by the PPF authorities. The PPF liability can be calculated on two alternative bases: Section 179 for schemes that are already covered by the PPF and Section 143 for schemes applying to join the PPF (only Section 179 is currently available in ProVal). The Section 179 PPF liability is a termination liability based on capped benefits and utilizing special PPF interest rates (for more information, see the section of this article below entitled “How ProVal calculates the Section 179 PPF liability”).
To calculate the Section 179 PPF liability in ProVal:
Define the Valuation Assumptions by selecting Funding for Assumption Type and “PPF” for Applicable law. ProVal will automatically adjust / remove the following topics, to provide the indicated input values:
Decrements: Inactive mortality but not active decrements (these will be set, automatically, to immediate 100% termination – see “How ProVal calculates the Section 179 PPF liability” below).
Interest Rates: Adjusted in-deferment interest rates for pre- and post-2009 benefits and the adjusted post-commencement interest rates for pre- and post-1997 benefits.
Salary Increases: The usual salary scale elements (inflation and merit scale), primarily for backwards projection when historical salaries are not provided or are missing.
Pension Increases: In-payment increases on post-1997 benefits, including any PPF limitations (for example, capped at the lesser of 2.5% and RPI). ProVal will set all other increases automatically (see “How ProVal calculates the Section 179 PPF liability” below).
GMP Increases: Not included, because GMPs are ignored in PPF runs (see “How ProVal calculates the Section 179 PPF liability” below).
Increase & Crediting Rates: Same as ongoing. Primarily useful for entering future assumptions upon which pension increases are based (for CPI, RPI, etc.).
PPF Benefit Caps: Allows users to look up the PPF caps from a list of built-in historical values or enter them manually by copying/pasting from Excel (helpful if the caps are published last minute and ProVal is not updated in time for the PPF valuation).
Commutation: Not included, because commutation is ignored in PPF runs (see “How ProVal calculates the Section 179 PPF liability” below).
Liability Methods: Not included, because 100% immediate termination is assumed and thus the accrued liability under any cost method will equal the PVB.
Set up Inactive Benefit Definitions and (Active) Benefit Definitions with a termination Contingency (under the Benefit Definitions command) to determine the following for PPF:
Applicable PPF interest rates: For each tranche, specify the PPF Interest Category, to define which set of in-deferment and post-commencement PPF interest rates should be used. For example, if the category "1997 to 2009" is selected, ProVal will use the PPF in-deferment interest rate applicable to pre-2009 benefits and the PPF post-commencement interest rate applicable to post-1997 benefits. The actual PPF interest rates are defined under the Interest Rates topic of the Valuation Assumptions (if the Applicable law is set to "PPF").
Normal Pension Age (NPA): For Inactive Benefits, enter the (integer) NPA for retirees. This parameter is used only for Retired participants and only for determining the age when the PPF cap no longer applies. (For Vested and Active participants, the deferral age of the benefit determines the NPA. For Disabled and Survivor participants, the PPF cap is never applied.)
Generally, the same Census Specifications and Plan Definition can be used for accounting, ongoing funding and PPF valuations. However, a separate Census Specification set or Plan Definition may be justified for PPF, to deal with the following special cases:
NPA not equal to deferral age: If the “regular” valuation assumes deferral ages different from NPA for some deferred benefits (whether for “Vested” or “Active” participants), copy those deferred benefits and change their deferral age to NPA.
Lump sums related to salary and service: ProVal does not include any lump sum benefits when comparing the total benefit with the PPF benefit cap (but does include these benefits in the PPF liability). If lump sums exist that need to be included in the comparison with the PPF cap, replace them with equivalent annuity benefits for PPF purposes, where the annuity conversion uses the applicable PPF factors available at http://www.pensionprotectionfund.org.uk/TechnicalGuidance/Pages/CompensationCapFactors.aspx
Temporary benefits for current retirees: ProVal does not include temporary benefits for “Retired” participants when comparing the total benefit with the PPF benefit cap (but does include these benefits in the PPF liability). There may, however, be cases where a non-temporary benefit is split into two benefits: a temporary one and a deferred one. In that case, these two benefits may need to be combined for PPF purposes to avoid inadvertently excluding the “fake” temporary benefit from the comparison with the PPF cap.
Children’s pensions in payment: ProVal does not force children’s pensions in payment status to cease at age 18 (or 23, if currently over 17) for PPF purposes. If the “regular” valuation uses a temporary age different from that prescribed under PPF, these benefits may need to be adjusted for PPF purposes.
Money purchase plans / Crown guarantee: ProVal does not automatically exclude money purchase plans and benefits with a Crown guarantee from the PPF liability. If those benefits apply, you may need to exclude them for PPF purposes.
Certain periods: ProVal does not automatically exclude any periods certain (“guarantee periods”) from the PPF liability. As permitted, you can choose to exclude them from the PPF liability.
In-deferment lump sum death benefits: ProVal does not automatically exclude any in-deferment lump sum death benefits (i.e., life insurance with a coverage period during deferral). As permitted, you can choose to exclude them from the PPF liability.
Hybrid schemes (better of DB and DC benefit): ProVal does not automatically exclude these benefits from the PPF liability if the DC benefit is higher than the DB benefit as of the valuation date for a given member. You will have to make that determination separately and make sure the benefit is zero for PPF purposes for all members for whom the DC benefit is higher.
Run a Valuation or Core Projection, with “PPF” selected as the type of funding Valuation Assumptions.
How ProVal calculates the Section 179 PPF liability
ProVal sets the Normal Pension Age (NPA) for retiree benefits to the age specified under the NPA for Retirees parameter of the Inactive Benefit. For non-pensioner (actives and terminated vested) benefits, ProVal uses the deferral age specified for each benefit. For post-decrement death benefits, the NPA is set equal to the Assumed member retirement age.
ProVal applies the PPF compensation caps to the total benefit on the valuation date across all applicable benefits and then reduces the capped benefit by 10%. For benefits of actives and terminated vested members, the PPF cap is “looked up” as of the latest NPA across all applicable benefits. For retirees, the PPF cap is looked up as of age last birthday on the valuation date. The cap is applied separately to the total member benefits and the total spouse benefits.
For example:
The unadjusted member benefits at valuation date are:
| (1) Benefit 1: | 7,000 |
| (2) Benefit 2: | 9,000 |
| (3) Benefit 3: | 11,000 |
| (4) Benefit 4: | 13,000 |
| (5) Unlimited Total: | 40,000 |
The member benefit adjustments are:
| (6) Latest NPA: | 65 |
| (7) PPF cap for age 65: | 34,049.84 |
| (8) Apply PPF cap: | 34,049.84 = MIN (40000, 34049.84) |
| (9) Apply 10% Reduction: | 30,644.86 = 34,049.84 * 90% |
The adjusted member benefits at valuation date thus are:
| (10) Benefit 1: | 5,362.85 = (1) * (9) / (5) |
| (11) Benefit 2: | 6,895.09 = (2) * (9) / (5) |
| (12) Benefit 3: | 8,427.34 = (3) * (9) / (5) |
| (13) Benefit 4: | 9,959.58 = (4) * (9) / (5) |
| (14) Limited Total: | 30,644.86 |
The PPF cap and 10% reduction are not applied to (a) benefits where valuation age (exact age for inactive members, age nearest birthday for active members) is greater than or equal to NPA, (b) participants with a disabled or survivor status, (c) temporary pensions for current retirees or (d) lump sum and life insurance benefits. These benefits are still included in the PPF liability, just not subject to the cap and reduction.
ProVal sets the In-deferment PPF applicable interest rate for all benefits to the one for post-2009 benefits. To reflect the separate in-deferment interest rate for pre-2009 benefits, ProVal adjusts the in-deferment pension increases (prescribed to be zero for PPF purposes) as follows:
| Benefit | Prescribed interest rate | Prescribed pension increase | ProVal interest rate | ProVal pension increase |
| Pre-2009 benefits | A | 0 | B | C = (1 + B) / (1 + A) - 1 |
| Post-2009 benefits | B | 0 | B | 0 |
This way, the present value of the pre-2009 benefits in ProVal ((1 + C) ^ n / (1 + B) ^ n) equals the prescribed present value (1 / (1 + A) ^ n) for any deferral period n.
ProVal sets the Post-commencement PPF applicable interest rate for all benefits to the one for post-1997 benefits. To reflect the separate in-payment interest rate for pre-1997 benefits, ProVal adjusts the in-payment increases of the pre-1997 benefits (prescribed to be zero for PPF purposes) as follows:
| Benefit | Prescribed interest rate | Prescribed pension increase | ProVal interest rate | ProVal pension increase |
| Pre-1997 benefits | D | 0 | E | G = (1 + E) / (1 + D) - 1 |
| Post-1997 benefits | E | F | E | F |
This way, the present value of the pre-1997 benefits in ProVal ((1 + G) ^ n / (1 + E) ^ n) equals the prescribed present value (1 / (1 + D) ^ n) for any payment period n.
Note the following:
ProVal treats all benefits as if GMPs do not apply (even if some of the benefits have non-zero GMP amounts applied to them). Essentially, this means that the entire benefit will be treated as “excess” and the GMPs will be treated as if zero.
ProVal treats all benefits as if commutation does not apply (even if some of the benefits have a check in the Commutation applies box). If the commutation has already happened (e.g., current retirees), the post-commutation pension is valued as normal.
ProVal sets the spouse continuation fractions on all “post-decrement death” benefits to 0.5. The spouse fraction is applied after the PPF cap and the 10% adjustment. (Technically, death-in-deferment benefits are capped at valuation age, while death-after-retirement benefits are capped at NPA like all other benefits. To avoid the complexities of applying a different cap based on member death age, ProVal uses the cap at NPA for both.) Just as for a “regular” valuation, the spouse fraction is applied to the pre-commutation pension specified in the benefit.
ProVal sets termination probabilities for active members to 100% immediately (beginning of year timing). Only termination benefits are valued (including “death after termination” benefits, which cover death both in deferment and in payment). Benefits under all other contingencies (retirement, disability, etc.) are ignored.
ProVal does not add administrative expenses (“external liabilities”), estimated wind-up expenses or benefit installation / payment expenses.
Although PPF Core Projections are supported, there are several notable limitations:
When valuing current inactive members, the PPF cap is applied using values and ages at the original valuation date. This means that if a deferred member age 63 on the original valuation date reaches an NPA of 65 in projection year 3, ProVal will continue to cap the benefit in all projection years (and use the age 65 cap) because the member’s age was under NPA on the original valuation date. Similarly, a retired member age 58 on the original valuation date will be capped with the PPF cap corresponding to age 58 in all projection years, rather than the PPF cap for age 59 in projection year 2, the PPF cap for age 60 in projection year 3, etc., and ignoring the PPF cap in projection years 8 and later when the retiree reaches NPA. This limitation does not apply to current active members.
No increases are assumed in the PPF cap between projection years, for both current active and current inactive members. This means that the set of PPF caps prescribed as of the original valuation date will be used in all projection years.