The PPF has published the levy estimate and a consultation on the draft levy Determination for 2012/13. An important new feature is a change to the certification requirements for ‘Type A’ (i.e. parent company/ group company) guarantees, dealt with in more detail below.
The levy estimate of £550m is expected to be about the same in 2013/14 and 2014/15, though an updated estimate will be made and the Determination published before the start of each year.
The consultation on the draft levy Determination for 2012/13 largely follows proposals already published in the PPF’s earlier policy statement (see Pensions Update, May 2011). Click here to view table.
Consultation closes at 5 p.m. on 2 November 2011. A summary of responses, any changes to the proposals and the final Determination are to be published by the end of the year.
Contingent assets/Type A guarantees: much tighter rules
The consultation includes proposals to make changes to the rules for contingent assets. In particular, the PPF is concerned that some guarantees are not sufficiently valuable as the guarantor is not in fact good for its guarantee. It proposes that, for both new and existing contingent assets:
“For Type A contingent assets, schemes will be required to certify on Exchange that guarantors could be expected to meet their full commitment under the contingent asset if called upon to do so as at the date of the certificate. We may reject a contingent asset if it appears to us that it does not reduce the risk of compensation being payable to the extent that is consistent with the levy reduction secured.”
In this connection the PPF intends to take “active steps to obtain comfort as to the financial strength of entities which are entering into guarantee arrangements” and “where there is reason to question the value of the arrangement to a scheme, we may request further independently verifiable information to assist us in deciding whether to accept that contingent asset”.
If the proposals are implemented, the process of recertifying group company guarantees will no longer be a fairly mechanical exercise. At the very least trustees will require up-to-date information about the financial strength of the guarantor. They may also need to seek specialist covenant advice in order to check whether the guarantor is good for the amount guaranteed and, if not, renegotiate improved security or a lower guaranteed amount.
Reducing your investment risk to reduce your 2012/13 levy
Schemes with s179 liabilities of £1.5bn or more (representing the most risk to the PPF in terms of possible size of claims) will have to include in the annual scheme return a more detailed analysis of their assets (the ‘bespoke investment risk approach’). This will be optional for smaller schemes.
PPF Bulletin No 9 notes that there is still time to affect the assessment of insolvency risk used for a scheme’s 2012/13 levy, as D&B are measuring these insolvency risk scores throughout 2011/12 (as opposed to previous years, when measurement was a year in advance). It also includes tips such as the following:
- Reporting the split of underlying assets held in a pooled fund rather than merely reporting holdings in the “insurance” or “other” categories could lead to a levy reduction.
- Schemes with derivatives might consider whether the bespoke investment risk approach may be more appropriate for them.