The Pension Protection Fund (“PPF”) has published its Triennium Policy Statement and Consultation Document, outlining the levy structure which will apply for the next three years until 2017/18. This confirmed the results of the consultation issued in May, introducing a new “PPF specific” risk scoring system with a new measure to assess the risk that a scheme employer will experience an insolvency event during the levy year. The Consultation Document also confirmed the move to a new insolvency risk provider – Experian with effect from 31 October 2014.
New risk model
The new method of assessing insolvency risk will be based solely on information about organisations sponsoring DB schemes, reflecting the specific profile of schemes in the PPF, rather than scores based on UK businesses in general. This recognises the differences between the average UK business and the typical sponsor of a DB pension scheme. For example whilst most UK businesses are stand alone entities, the majority of PPF scheme employers are either a parent or subsidiary company. This approach was supported by a significant majority to the 2015/16 levy consultation document, which received the highest response to any of the PPF’s consultations since 2005/06.
Under the new model, each organisation will be allocated one of eight different segments grouped by size of employer, corporate structure and the filing of full or abbreviated accounts. These segments contribute towards the production of a scorecard, a tool to allow for the prediction of an organisation within a segment’s likelihood of failure. The model is based on financial information from a range of sources including Companies House, the Charity Commission and Experian’s trade payment system, and will not be industry specific. Unlike the old regime, it does not take into account factors such as geographical location and details of directors. Changes have also been made which give particular consideration to the position of group companies, including a component based on the strength of the wider group. This should increase the proportion of ultimate parent companies correctly identified. Not for profit entities (NFPs) will be given a separate scorecard as the PPF considers that the factors that are predictive of insolvency are less predictive for NFPs.
The PPF had previously considered an option to use credit ratings to override model scores. Although opinions were divided on these ideas, significantly more responses were against them. The PPF also had concerns, particularly over complexity, and so these proposals will not be implemented.
The scorecards will be used to create a series of ten bands with a levy rate for each band. The first band contains the lowest twenty per cent of risks, followed by bands two to eight with ten per cent for each, and the last two bands, the highest risks, having five per cent each. The consultation document confirmed that this approach, favoured by almost 80% of the responses, rather than the idea of merging the top three bands to result in eight bands. Some changes to the band boundaries have been made since the last proposal. Most organisations will be unaffected by these changes, but those that fall into bands six, seven and eight will see an increase in their levy from that proposed earlier in the year.
The levy estimate for 2015/15 has been set at £635 million, a reduction of nearly 10% from the 2014/15 estimate of £695 million. However, the new model will mean that, rather than all schemes seeing a slight reduction in levy, there will be some big winners and losers. The PPF expects around 32% of schemes to see a decrease, with the average decrease being 40%. On the other hand, around 25% of schemes will see an increase, with the average increase being 130%.
As a result of the lower estimate, the levy scaling factor is 0.65, lower than the 0.74 factor published in May, and the scheme-based levy multiplier is 0.000021.
The PPF has said it has been able to reduce the quantum of the levy because of its improved funding position. The expectation is that the levy estimates for the following two years will fall further, based on the expected path of asset values and yields.
As part of the switch of provider to Experian, schemes have the facility to check their data and scores online, via the PPF Portal. The risk score used for the calculation of levy bills is based on the average of month-end scores over 12 months (or six months for the 2015/16 levy). Given the potential change in levies, pension scheme trustees and sponsoring employers should look now to estimate their 2015/16 levy.
The PPF will continue to calculate levies using information from the annual scheme return submitted via the Pensions Regulator’s Exchange System. This must be done by 5pm on 31st March 2015.
Existing Contingent Assets - 2015/2106
Schemes should start thinking about whether they can recertify existing contingent asset arrangements based on the new certification requirements. Where asset-backed contribution arrangements are in place, schemes need to consider the impact of the PPF’s new requirements for recognising underlying assets.