The Pension Protection Fund (PPF) levy Determination for 2016/17 was published on 17 December 2015. It follows a consultation with PPF stakeholders which was launched in September this year. The levy Determination sets out the rules for calculating a scheme’s annual PPF levy. In our September Update we reported on the key changes which were being proposed as part of the 2016/17 consultation process.    

Over recent years the PPF has placed an emphasis on stability for levy payers. In order to achieve this the PPF has put in place the levy triennium.  At the beginning of each levy triennium the PPF has announced its intended model for the PPF levy over the next three years. The PPF’s second levy triennium began in 2015/16 and saw the introduction of sweeping changes including the new PPF-specific insolvency risk model. 

Levy payers will be pleased to know that there have been relatively few changes as part of the 2016/17 levy Determination; the changes that have been introduced largely concern certification requirements or are intended to build on the sweeping changes made as part of the PPF’s second triennium in 2015/16. 

The key points to note are:

  • Mortgages - The process of recertifying mortgages has been simplified. The main change is that there will be a carry forward of mortgage exclusion certificates which were accepted in 2015/16, including those relating to investment grade credit ratings, pension scheme mortgages and rental deposit deeds.  Immaterial mortgages will need to be re-certified annually.  
  • Asset Backed Contributions (ABCs) - A “light touch” approach has been introduced in respect of recertifying ABCs.  Updated PPF guidance sets out when this “light touch” approach may be suitable but ultimately leaves the decision of whether a full valuation or updated valuation is required to the professional valuer.  The PPF also clarifies that schemes can rely on previous legal advice where there has been no change in legal position underlying the ABC since the previous certification.   
  • New Companies - The types of information which may voluntarily be provided to Experian has been expanded so that new companies may now opt to submit interim accounts in order that they can be more accurately scored by Experian.   
  • Experian Appeals - A small change has been made to broaden the scope of the appeals process with Experian so that where relevant mortgage information is unavailable at the measurement date, it may still be taken into account where lack of availability is through no fault of the trustee, employer or other group company (as appropriate).    
  • Exchange Rates - The PPF’s proposed changes to the convention on exchange rates are not being implemented in this levy year but will be deferred until 2017/18.

The PPF has already started work on the 2018/19 triennium.  It is also considering whether changes are necessary to deal with the introduction of the new financial reporting standard FRS102.    

Risk reduction

In its statement announcing the publication of the 2016/17 levy Determination, the PPF encourages schemes to consider whether they have in place the right risk-reduction methods.  Where a risk-reduction arrangement is recognised by the PPF (for example, additional employer contributions and certain types of contingent asset), that arrangement may operate to reduce a scheme’s risk-based levy provided that schemes and employers take the required action and submit the required information to the PPF by the prescribed deadlines. 

The actions and deadlines vary depending on the type of risk-reduction arrangement.  For example, trustees may need to obtain and submit a valuation of secured asset(s) or obtain a formal legal opinion.  One of the most common forms of recognised risk-reduction arrangement is the PPF standard parent or group company guarantee (PCG).  For a PCG to be recognised the trustees must certify the amount they believe the scheme will be able to realise from the guarantor in the event that the scheme employers become insolvent.  In order to provide this certification,  trustees will need to assess the strength of the guarantor (PPF guidance is available on this), which should include:

  • making enquiries into the financial position of the guarantor(s);
  • considering the impact of the insolvency of the scheme employers on the amount which may be realised from the guarantor; and
  • obtaining evidence and challenging assertions made by the guarantor, where appropriate.

Assessing the strength of the guarantor can be time consuming.  However, it is important that it is carried out carefully because if the PPF disagrees with the amount certified the PCG will not be approved.

Schemes and employers wishing to put in place a recognised risk-reduction arrangement for the 2016/17 levy year will need to act now.  Those with existing risk-reduction arrangements in place will need to ensure that they have undertaken all required steps to ensure successful recertification for the 2016/17 levy year. 

Action and Timetable

There are a number of steps which trustees and employers can or should be taking ahead of the 2016/17 levy year.

Click here to view the table.