I have a question about the exam solution for Q1(ii). Last line in Page 5, the third risk reduction options: "Full or partial buyout with an insurer", it said a a partial buyout should reduce PPF levy. I can't work this out. Buyout cost is larger than PPF liabilities. A buyout of its pensioner liability would be an experience loss on the PPF basis, it should increase the PPF deficit amount. All other things remain the same, PPF levy would increase. Although the lower investment risk strategy would reduce the levy to some extent, overall it can move both way (more likely to increase unless the buyout is partially funded by the sponsoring employer.) Thanks Quang
The PPF liability is based on an estimate of buyout costs. Also remember that most pensioners get 100% under PPF (all of those over NPA or ill-health retirees). Therefore it doesn't have to be an experience loss. In addition, the levy is based on 1.36*liabilities-assets (called U in the notes, assuming funded less than 135% of PPF basis). So, for example, if on the PPF basis, I have 100 liabilities and 50 assets and I use the 50 assets to buy out half of the liabilities, the levy used to be based on 1.36*100 - 50=86 now it is based on 1.36*50 - 0= 68, so lower!! I don't know who made up the formula, but the results of it are not exactly what I would expect.
Good point Korach - thanks for your explanation. Pensioners receive 0% and 2.5% capped increase under PPF for pre 97 and post97 benefits. So if a scheme awards RPI linked pension increases, PPF liability will be lower than its buyout cost. Although it would require an experience loss of say 13 to be borderline in your example below. Thanks.
Thank you for your point. It is important not to be too dogmatic (as Stuart said). As you say, in this case the statutory increases in payment in PPF can be the same or lower than the scheme's increases. There really are a lot of details here to keep in mind! Good luck in the exam to you and to anyone else reading!
