Trustees of defined benefit pension schemes which claim to be "Last Man Standing Schemes" for Pension Protection Fund risk based levy calculation will receive an email from the Pensions Regulator soon (if they have not already received one).

Subject:

Pension Protection Fund (PPF) levies - legal opinion on "Last Man Standing" status.

Document:

The Triennium Policy Statement and 2015/16 Pension Protection Levy Determination.

Key date

Trustees need to confirm to the PPF that they have received an opinion by 5.00pm on 29 May 2015.

Who is this consultation relevant to?

Employers of multi-employer defined benefit pension schemes eligible for PPF protection. Trustees of those schemes.

Background

The PPF provides compensation to members of defined benefit pension schemes where the sponsoring employer of the scheme becomes insolvent and the scheme cannot provide 100 per cent PPF compensation. Part of the PPF's funding to provide compensation comes from a levy on eligible schemes. The PPF calculates the levy based on (amongst other things) the likelihood the scheme's employer will become insolvent and that the scheme it sponsors will have to enter the PPF.

For multi-employer pension schemes the PPF nuances this calculation based on what the scheme rules say will happen if some employers become insolvent, but others remain going concerns.

What is a "Last Man Standing" pension scheme?

You will find the PPF's definition of a "Last Man Standing" pension scheme in the snappily named rule E6.2(2) of the 2015/2016 Levy Determination. In summary it is a multi-employer pension scheme where under the scheme rules the liabilities of the scheme pass to the last employer in the scheme where the other employers have ceased to participate or become insolvent. It does not include a scheme whose rules give the trustees the option or duty to segregate a section of the scheme where an employer departs (whether through insolvency or otherwise).

The "Last Man Standing" structure has two effects, First employers in these schemes need to factor in all the liabilities of the scheme when considering their potential pension liability. Second the PPF gives them a discount on the risk-based PPF levy as they are less likely to enter the PPF given the additional support from the other employers in the scheme. 

For previous levy years, this discount was a fixed 10 per cent. For this levy year the levy reduction will beup to 10 per cent. The exact figure will depend on the member dispersal between the employers in the scheme, with less credit given where one of the employers holds the majority of members in the scheme.

What is the issue then?

Even allowing for the tapered levy discount, the basic question for the PPF remains whether any given scheme is a "Last Man Standing" scheme. From experience the PPF has discovered that some schemes which claimed to be "Last Man Standing" schemes for risk-based levy purposes have turned out not to be in practice. This meant the schemes got the benefit of a reduced levy they should not have had and ended up as a liability of the PPF anyway.

To address this problem, the Pensions Regulator will write to all schemes that claim this reduction asking them to confirm to the PPF that they have received a legal opinion from an appropriate adviser confirming their "Last Man Standing" status. Trustees need to provide this confirmation by 5.00pm on 29 May 2015. (Although the determination only states that the opinion must be confirmed "by" 29 May 2015 we have asked the PPF to confirm what this meant and they stated it meant by 5.00pm on that day). Failing this the PPF will calculate the scheme's risk-based levy without the discount.

Dentons' comment

Employers who participate in "Last Man Standing" multi-employer schemes (and who in the end bear the cost of the risk-based levy) should ask the trustees of their scheme to get a legal opinion on this point before the deadline. Failing to do so could result in a 10 per cent increase in the risk-based levy.