The PPF ran a webinar on 25 November 2009 covering valuation guidance for actuaries of FAS qualifying schemes.

At the webinar, attendees submitted a number of questions which were answered orally on the day. Questions were also posted on an online discussion forum which followed the webinar. For reference, we have provided written answers to a selection of these questions below. Please note that these represent the policy position at the time of the webinar and therefore may not represent the most up-to-date position. They should be read in conjunction with the relevant guidance and legislation once this becomes available.

Can trustees review the notional pension calculation, given the Scheme Actuary does not conduct it?
It is the responsibility of the FAS scheme manager to determine the notional pension or survivor notional pension along with approving the valuation in respect of a qualifying pension scheme. Trustees have the power to review the results of the valuation. There is no facility for trustees to review the notional pension calculation. However, scheme members do have the right to request a review of their Assistance and lump sum, both of which may be based on their notional pension.

What happens where there is not enough money to pay for the valuation?
The FAS scheme manager has the authority to waive the requirement to carry out a valuation if necessary. If there was not enough money to pay for the valuation then there would also be no money to cover member liabilities so each scheme member’s asset share would be zero. There would therefore be no need to carry out the valuation. The scheme manager would instruct the trustees or managers of the qualifying pension scheme not to carry out the valuation in this case.

We have a scheme with DC benefits with a GMP underpin. Is there a special treatment for these?
When a scheme provides benefits which are equal to the greater of two or more different calculations, then the total scheme liability is the liability based on the benefit structure that generates the highest liability amount. If different parts of an underpin benefit are allocated to different priority classes, then actuaries should adopt a method consistent with that explained in paragraphs 3.9.1 and 3.9.2 of version 4.5 of GN19. The Government is aware that the allocation of underpin benefits to priority classes is currently an area of legal uncertainty.  The Government may provide further guidance on this point following final judgement in the Bridge v Yates case.

How do you treat members who have taken transfer values and windup lump sums since the wind up began?
These members are treated like members of “FAS 1” schemes i.e. schemes which have fully annuitized (or committed to do so). The transfer value or windup lump sum would be converted into a notional annuity. This would be compared to 90% of expected scheme pension and the members would receive a top-up from the FAS if necessary.

What factors should be use in the interim period?
In the interim period before assets transfer, the factors used would be the factors specific to the scheme as specified by the trustees.  However, one issue that the trustees may wish to consider when setting scheme factors is the FAS factors.

The data validation requirements for a FAS valuation would seem to be much higher than for a normal valuation because of the need to have individual values rather than an overall value. Do you agree?
The FAS Scheme Manager expects that actuaries would carry out checks to satisfy themselves that data is fit for purpose before carrying out any valuation. We are therefore expecting that the actuary should be satisfied that the data is in a fit state to be used for the FAS valuation. However, we do not expect that the actuary will be carrying out any of the work required to gather and clean data for the valuation; we expect that in most cases, trustees will assign this task to scheme administrators.

In the first consultation (published in April 2009), asset share for a pensioner could be based on MFR whereas outside of FAS the benefit would have been bought out at 100%.  Is guidance changing on this?
We do not expect any changes to the guidance on this point.  The asset share should be calculated according to the statutory priority order, and for some cases it specifies that the asset share should be calculated on the MFR basis.  However, legislation gives the actuary discretion in certain circumstances to use a basis other than MFR (including a buy-out basis) in calculating liabilities for windup priority orders, if the actuary considers it to be more appropriate.  If such discretion is exercised, the actuary should notify the FAS Scheme Manager.

Why do deceased members' estates receive a windfall from FAS when they wouldn't have received any additional benefits under scheme rules?
A deceased member’s estate would only receive a payment in respect of benefits that the deceased member was entitled to under FAS and had not received prior to his actual death only (i.e. not the asset share based on the member’s expected life expectancy). This payment is therefore is respect of arrears only and does not constitute a windfall.

Will there be a standard "late retirement adjustment" applicable for parts of pension that could have been paid unreduced as of right prior to Normal Pension Date?
Please see paragraph 6.10 in the draft guidance published in April on method and assumptions to use when undertaking an asset share valuation for treatment of member options.  Essentially, unless the member has a fully specified unfettered right to take up an option under scheme rules (and the liability would increase assuming that the member would take up the option) no allowance should be made for members choosing to take an option.

There is a distinction here between the factors used for the calculation of liabilities for the FAS valuation and the calculation of the expected benefits under FAS.  The liabilities valued should be calculated using any adjustments specified in the scheme rules, i.e. the scheme factors currently in force (subject to the FAS requirements for treatment of options noted above).  However, when expected benefit payments are calculated, tranches payable at different ages under scheme rules are all aligned to a single FAS Normal Retirement Age using uplift/reduction factors specified by FAS.

Can the Spinnaker Trust accept protected rights only benefits without member consent?
The Spinnaker Trust has arrangements in place to be able to accept protected rights on a no-consent basis.

Legislation was due in December 2009, but is now due in spring 2010. What will happen to timescales if a General Election is called/change of government ensues?
The Department of Work and Pensions is currently working towards implementing the draft Financial Assistance Scheme (Miscellaneous Arrangements) Regulations 2010 by Parliament’s Easter recess. Passage of Regulations is always subject to Parliamentary scheduling.

How does the valuation interact with deemed buy back payments?
If a deemed buy back payment has been made in respect of an individual, an asset share will be calculated for them as part of the valuation. This asset share will be based on liabilities excluding the GMP liability which has been discharged via the deemed buy back payment. The lump sum payment made via the deemed buy back is converted into a notional pension and deducted from 90% of expected pension. The individual’s notional pension and adjusted expected pension are then compared to determine their FAS Assistance.

Will there be any special allowance for ill health early retirees who received enhanced pensions, e.g. on mortality rates?
There are no special allowances made for ill health early retirees who received enhanced pensions.

What happens where annuities were purchased to secure benefits fully for pensioners who retired before the winding-up date, but the benefits secured turn out to be more valuable than the asset shares?  Do these annuities need to be partially surrendered, and members' benefits cut back?  What happens if the annuities have no surrender value?
If the surrender value is greater than the value of benefits secured by the annuity (as assessed on the FAS synthetic buyout basis) the contract should be surrendered and the cash value will transfer to the Government. If the surrender value is less than the value of benefits secured, or if there is no surrender value, the draft Regulations provide for the Government to be able to take in such assets and for a value to be placed upon them in the valuation. The income arising from the policy would be payable to the Government rather than individuals. In these cases FAS assistance will then be paid to members, based where appropriate on their asset share.

ARPs cause a strain on SERPS. If you use the ARP to calculate a notional annuity you produce a lower notional annuity than the GMP the member will receive. Higher FAS assistance will then be paid – is this not a double cost to the taxpayer?
ARPs reinstate into SERPS. The amount of SERPs paid may be different from either the GMP or the notional annuity calculated from the amount of the premium. DWP has accepted that anomalies may arise in order to allow a pragmatic approach to the calculation of assistance. 

Can some members effectively lose the value of their asset share - if notional pension turns out to just offset means tested state benefits when they reach NRA?
Income received from FAS Assistance is allowed for when calculating means-tested state benefits. Not all members’ Assistance is directly based on their asset share; only those whose asset share provides more than 90% of expected scheme benefits at windup will receive regular payments based on their asset share.  These members could effectively lose the value of their asset share if Assistance turns out to just offset means tested state benefits when they retire. However, annuities paid by insurers to individuals are treated in the same way as FAS Assistance when determining means-tested benefits. Therefore the same result would have occurred for members of FAS qualifying schemes had they wound up outside of FAS, i.e. by discharging their liabilities to members by purchasing annuities from insurance companies.