THE REFORMS AT A GLANCE
- The PPF will soon begin the process of calculating schemes’ levies for 2015/16. Levies will be calculated on the basis of information and certificates which schemes have submitted by the PPF’s “measurement time”. For most purposes, this means 5pm on 31 March 2015.
- The PPF has made a number of changes to the levy rules as from 2015/16. In particular, changes have been made to:
- the insolvency risk score provider and method of calculation – as a result, some employers’ insolvency risk score will change;
- the treatment of asset-backed contribution (“ABC”) arrangements;
- the treatment of “last man standing” (“LMS”) schemes; and
- the certification requirements for Type A contingent assets (i.e. group company guarantees).
- Trustees and employers should ensure that they understand the new rules, and that all relevant information and certificates have been correctly submitted by the relevant PPF deadlines. The PPF will very rarely allow errors or omissions to be put right after the event.
NEW INSOLVENCY RISK PROVIDER
What’s changing? The biggest single change for the 2015/16 levy is a new basis for assessing employers’ insolvency risk. Among other things, the PPF has appointed Experian as its insolvency risk provider, in place of Dunn & Bradstreet. Experian’s basis for assessing insolvency risk is very different from Dunn & Bradstreet’s. Some employers will find that their failure score for 2015/16 has changed markedly from previous years.
What about mortgages? Experian attach considerable weight to the age of any mortgages (charges) which an employer has created – the rationale being that new mortgages may mean that the employer is in financial trouble. Experian will however disregard certain sorts of mortgage, if a certificate of a prescribed type has been submitted to them by the 31 March deadline. Trustees and employers should consider whether such certificates could usefully be submitted. They may also want to check whether employers’ Experian scores have been correctly determined, and whether (apart from the mortgages point) there are steps which could be taken to improve scores going forwards.
What about data held on Exchange? The data held on Exchange may have a major bearing on a scheme’s levy. For example, in a multi-employer scheme, the levy will depend to a substantial degree on the companies which are listed as statutory employers, and the number of members associated with each employer. Trustees should ensure that the data held on Exchange as at the 31 March deadline is correct.
What is the LMS discount? Most multi-employer schemes are entitled to a discount on the levy if they have an LMS structure. LMS means, broadly, that there is no discretion or obligation under scheme rules to segregate assets where an employer withdraws from the scheme. In the past, the discount for LMS schemes was 10%. For 2015/16, the discount is calculated using a complex formula, which will produce a lower figure.
What’s changing? A change to the PPF’s rules means that for 2015/16 it will only recognise a scheme as LMS if the trustees confirm to the PPF by 29 May 2015 that they have received legal advice which confirms the scheme’s LMS status. (The Pensions Regulator will contact trustees to request this information.) Trustees who wish to claim the LMS discount should contact us well in advance of 29 May, to ensure that they have advice in the required form.
What’s changing? For 2015/16, the PPF has radically changed its rules on the treatment of ABC arrangements – partnerships in which trustees and employers co-invest. In very broad terms, the PPF’s new approach is to strip out the value of any ABC arrangement when assessing a scheme’s funding position. The PPF will however add back an amount if trustees submit a specified certificate and information by the 31 March deadline. This amount will be capped at the trustees’ likely recovery under the ABC arrangement, on a “fire sale” basis, in the event of employer insolvency.
How can ABC arrangements be certified? The PPF’s guidance requires trustees to jump through a large number of hoops before submitting a certificate. Trustees must obtain a formal valuation plus legal advice covering a long list of issues (and legal advice must be supplied to the valuer for the purpose of the valuation). Where, as often, there is a Scottish dimension to the ABC arrangement, separate Scots law advice is likely to be required. The process will be time- consuming and costly, and will need to be started well in advance of the 31 March deadline. Trustees and employers with ABC arrangements should consider whether they wish to submit a certificate, so as to benefit from the add-back described above. If they do, they should seek professional guidance without delay.
What are contingent assets? Trustees and employers can potentially reduce PPF levies by putting in place “contingent assets” – for example, charges over property or group company guarantees. The PPF will recognise a contingent asset only if a long list of requirements is met. The asset must be of a prescribed type and must be documented in prescribed form. And the trustees must submit a certificate and other specified documents by the 31 March deadline. These documents include a formal legal opinion. A simpler recertification procedure potentially applies if a contingent asset was in place and recognised for the 2014/15 levy year, but even this is not straightforward.
What’s changing? The PPF has once again tightened up its rules for “Type A” contingent assets (i.e. group company guarantees). When certifying, trustees will be required to state the amount of the “realisable recovery” under the guarantee, having made “reasonable enquiry” into the financial position of the guarantor and taking account of the likely impact of the immediate insolvency of the relevant employers. Trustees may well need expert advice about this. In any case the PPF reserves the right to form its own view as to realisable recoveries, and will normally disregard a guarantee entirely if it concludes that the recovery would be inadequate. Given the change in the PPF’s rules and possible changes to the strength of guarantors, trustees should not assume that a guarantee which “worked” for the 2014/15 levy will necessarily “work” for the 2015/16 levy.
Furthermore the PPF now has a general power to disregard partially a contingent asset of any type, if the PPF concludes that the asset would generate a levy saving disproportionate to any reduction in risk.
WHAT SHOULD TRUSTEES BE DOING?
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