Explanations of the main calculations we use for pension valuations, in line with sections of The Pensions Act 2004.
The section 179 valuation (s179) valuation is set out in The Pensions Act 2004. It’s designed to approximate the value an insurance company would need to be paid to take on a defined benefit (DB) pension scheme and pay its members benefits equivalent to those we provide.
The methodologies used to derive the s179 assumptions are determined by us, having consulted with insurance companies. They’re published on our website, and updated when necessary. These assumptions include the discount and inflation rates, as well as life expectancy and other demographic assumptions.
S179 valuations are used in our levy calculations, and the s179 measure is used in our Purple Book and 7800 Index.
Similar to that of a s179 valuation, a section 143 valuation (s143) calculates the funding position of a DB pension scheme assuming members of the scheme were to be paid benefits equivalent to those we provide by an insurance company. Unlike the s179 valuation, which is an approximate value, the s143 valuation is an accurate valuation of the funding position of the scheme.
The valuation is calculated by a scheme actuary whilst the scheme is in our assessment period and will help determine if a scheme will transfer to us or if it has sufficient assets to buy out benefits with an insurer at or above PPF benefit levels.
Section 75 or buy-out basis
This measure is used to approximate the premium insurance companies would charge to take on the full liabilities of a DB pension scheme. If a scheme was to be ‘bought-out’ by an insurance company, this is the amount that would need to be paid to the insurance company in order for it to take on the scheme and pay the members their promised benefits.
Insurance companies have a different regulatory regime to pension schemes which requires them to hold capital. Also, given that an insurance company would be unable to secure further funding for the scheme after it had been ‘bought out’ to meet any increases in the scheme’s liabilities and at the same time make a profit, this measure often places the highest value on the scheme’s liabilities.
When a scheme’s sponsoring employer becomes insolvent, any creditor claims by the pension scheme, including those made by us on its behalf, would be on this basis. A 'buy-in' is similar except the risk of any increases in the scheme’s liabilities remains with the scheme.
Technical provisions basis
This measure is used by scheme trustees as part of the mandatory three-yearly scheme valuation. The assumptions used to calculate this valuation are not prescribed, but the trustees are required to incorporate an appropriate level of caution in the assumptions they choose. More caution means a higher value is placed on liabilities, and vice versa.
The measure is done on the basis of being able to pay out full scheme benefits and provides the basis for any deficit recovery contributions (DRC) to be made by the sponsoring employer of the scheme.
Accounting basis - corporate
Companies are required to disclose the value of their DB pension scheme liabilities in their annual report and accounts. The assumptions used are partly prescribed in the various accounting standards. They should generally be set according to the reporting of the company’s best estimate Broadly that there is a 50/50 chance of true liabilities being higher or lower than the value given.
If we're considering the reapplication of a scheme we may commission a new valuation of the scheme’s assets and liabilities. A scheme may reapply in this way if, for instance, its s143 valuation showed a surplus but after exiting our assessment it has been unable to buy-out benefits with an insurer. The new valuation would be like an s143 valuation except at a current date rather than the original date of coming into assessment.
The section 156 valuation (s156) is used to determine the funding level for a closed DB pension scheme. Trustees of a closed scheme are required to obtain actuarial valuations of the scheme, at intervals set in legislation. It is used to determine what benefits are payable under the scheme rules and whether an application needs to be made for us to assume responsibility for the scheme.
We use a section 158 valuation (s158) to determine whether a closed scheme should re-enter. Closed schemes are subject to periodic funding assessments by the scheme’s actuary. If the scheme appears to be underfunded, trustees must make a reapplication. This triggers a second assessment period and an s158 valuation will be used to assess whether the scheme should transfer to us.