How Pension Schemes Will Be Valued For Admission into the Financial Assistance Scheme

Gerald Forrester

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On 12th August 2009 the government published a consultation on the Draft Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2010, to seek views regarding its proposals for the delivery of the remaining elements of the extension to the Financial Assistance Scheme (FAS) announced on 17th December 2007.

The draft regulations detail that a valuation must take place, on what basis the valuation is to be performed, how different types of liabilities and assets are to be treated and guidance on what information has to be included in the valuation report submitted.

The draft regulations explain that the FAS scheme manager will appoint an actuary to carry out a valuation of the liabilities and assets of the scheme. In exceptional circumstance where all assets will be allocated to pensioners who would not otherwise receive payments above FAS levels, a “full” valuation to determine members’ asset shares may not be required although a valuation is needed even where recent S73 valuations have been undertaken.

The regulations also detail some assets that will be excluded from the FAS valuation,including all DC AVC assets and benefits, assets for excluded members with benefits discharged outside the transfer process and Pre 6 April 1997 insurance contracts that have to be transferred into individual contracts in members’ names. How hybrid schemes are to be treated has still to be clarified.

Asset valuations undertaken will be based on SORP realisation values in accounts as at the calculation date. Except where the FAS scheme manager and Trustee liaise to adjust the cycle for audited accounts need to be prepared at the relevant time for the valuations. The regulations also do not require full audited accounts for the time between the valuation and when the assets are transferred to the Government.

The calculation date is the last day of the month in which the scheme actuary is appointed to undertake the valuation. Because the regulations encourage schemes to complete the liquidation of assets into cash at the calculation date or very soon after, it is expected the assets held at this date will probably only be gilts or illiquid assets agreed with the FAS scheme manager.

The actuarial guidance given will set out the calculation process for valuing pension liabilities and calculating asset shares in detail. The liability valuation and allocation are envisaged to use a “synthetic” rather than a “full” buy out basis. This basis will also be used by the FAS scheme manager to calculate notional pensions and other annuity factors for the calculation of FAS assistance.  The basis will be reviewed and updated to allow for market changes, with the revised basis and valuation guidance being open for consultation in autumn 2009.

Autumn 2009 will also see the release of further guidance covering the actuarial method and buy-out basis to determine the liabilities and the valuation of assets.

The regulations advise that where possible Trustees should convert any insurance products into individual contracts as members would then be eligible for top up of Assistance as the asset would not be transferred. Otherwise the income from a group policy will be payable to the Government and a value placed on the policy for FAS valuation.

Overarching powers are given for the scheme actuary to adjust values of assets considered unreasonable or substantially different to those shown in the accounts, but only with the agreement of the FAS manager. It is thought that these powers might be used in connection with surrender values of insurance contracts and where new assets might come to light, but further guidance is to be given on this matter.

The valuation report is likely to be submitted on a standard spreadsheet provided by the FAS scheme manager. What information is to be included in the submitted Valuation Reports has to be confirmed but is expected to include details of scheme liabilities, asset shares for beneficiaries and information to help the FAS scheme manager to validate the valuation.

The consultation process began on the 12th of August and is accepting writing responses for 8 weeks until the 6th of October 2009.

Spence & Partners have developed processes to prepare pension schemes for entry to the Financial Assistance Scheme and any trustees interested in our services should contact Brian Spence or David Davison.