The Pension Protection Fund (PPF) last week issued its consultation document on the third levy “triennium”, which covers the three years from 2018/19 to 2020/21. The current model will broadly be maintained, as the PPF considers it is working well. However, various changes have been proposed to reflect recent experience and some of these could have a material effect on certain schemes’ levies, as well as on PPF contingent asset compliance responsibilities.

What changes have been proposed?

Contingent assets

Some material changes are proposed in relation to the PPF contingent asset regime. These are summarised below.

  • A “guarantor strength report” would need to be prepared by a professional adviser before certification of “high value” Type A contingent assets. (A Type A contingent asset is a parent company guarantee which, once certified and accepted by the PPF, can reduce the levy payable.) The suggested “high value” threshold is £100m. The report would need to demonstrate that the guarantor could meet the guarantee in the event of insolvency of the employer and the consultation sets out a list of issues to be addressed in the report. Trustees would be expected to complete a report with each recertification.
  • Changes have been proposed to make it easier for guarantors that are also scheme employers to have a guarantee taken into account, and to make certification easier for multiple guarantors.
  • The PPF plans to conduct a full review of the wording of its standard form contingent asset agreements. Note that the PPF is intending to require that some, if not all, types of existing contingent assets are amended or re-executed so they are on the new standard terms. This is a significant change to the current regime and the PPF is inviting views on practical issues.
  • The PPF views the current treatment of asset backed contributions based on loan notes as overly generous - it will consider making changes to this.

Levy discount for good governance?

The December 2016 Work and Pensions Select Committee report on defined benefit schemes recommended that the PPF looks at how the levy might incentivise schemes to improve governance, potentially via a levy discount. The PPF is seeking suggestions as to how it could measure good governance (that is demonstrably linked to a reduction in insolvency, funding or investment risk) without creating unintended incentives or onerous administrative burdens.

Scorecards

The PPF’s review found the insolvency risk model developed with Experian, which includes eight “scorecards” for different segments of the PPF population, has performed well. However, it plans to make some refinements, for example:

  • to use credit ratings (from a credit rating agency) where available, to generate insolvency risk scores, and for un-rated entities regulated by the Financial Conduct Authority to use industry specific scorecards – again, supplied by a credit rating agency
  • to re-build the scorecard for not-for-profit (NFP) entities to better calibrate it with the PPF’s actual experience of insolvencies (the PPF has found performance of the current NFP scorecard has weakened and the insolvency rate for NFPs has risen)
  • to re-build the two “small accounts” scorecards to achieve a higher level of predictiveness
  • to combine the “large and complex” and “independent full” scorecards, dividing them instead by size using a £30m turnover threshold
  • it has identified a limited group of schemes where the risk of a call being made on the PPF cannot be assessed by looking at employer financial variables alone, due to their “proximity to government” – where merited, these schemes will be placed in Levy Band 1 (the most favourable band)
  • a non-standard approach will apply for schemes without a substantive sponsor – this was the subject of a separate consultation in respect of which which the PPF published a policy statement on 30 March 2017.

Small schemes

The PPF notes the smallest schemes sometimes lack the resources to obtain more than the legal minimum of actuarial input and may therefore receive little or no advice on levy issues, particularly risk reduction measures such as contingent assets and deficit reduction contribution certificates. The PPF says it is keen to understand whether elements of the levy system are problematic for smaller schemes and the appetite for simplification (within the limits of legislation).

Is my scheme’s PPF levy likely to go up or down?

According to the consultation, two thirds of schemes are likely to see a levy reduction, with one third (particularly some schemes with very large employers) seeing an increase. In particular:

  • NFPs and small and medium-sized enterprises are likely to see reduced levies in aggregate
  • schemes sponsored by credit rated companies would pay a similar levy in aggregate but “a small number” of those with non-investment grade ratings would pay substantially more
  • schemes on the new “Scorecard 1” (for non-subsidiary entities with over £30m turnover and very large subsidiaries) will, in aggregate, see their levy rise.

Note that the current consultation does not look at precisely how much is to be collected (that will be considered later) but on broadly how the burden of the sum collected will be shared.

Next steps

The consultation is open until 5pm on 15 May 2017. Schemes potentially affected by the proposals may wish to consider submitting a response, even if only on limited points.

There will be a second consultation in autumn 2017 setting out the PPF’s conclusions, finalised proposals, the overall quantum of the levy and a draft set of rules for 2018/19.

Comment

Broadly, the PPF considers that the current PPF levy model has performed well but there is room for improvement. As a result, material changes are potentially afoot for some schemes.

Some of the more significant proposals concern PPF contingent assets. This reflects concerns that the PPF continues to reject a sizeable proportion of the contingent assets (particularly Type A parent company guarantees) it reviews in detail. Certification and recertification of contingent assets has become a little more onerous over recent years. If the proposals in the consultation are implemented, this may become significantly more complex and costly – and, for guarantees worth £100m plus, would require professional advice and significantly more annual advance planning to permit disclosure of requisite information for preparation of the guarantor strength report, as well as preparation of the report itself. Schemes with PPF compliant contingent assets currently in place should also note that they face the prospect of having to amend or re-execute the agreements so that they are on new standard terms.

Providing a levy discount for good governance seems a laudable aim but is not without its challenges. The PPF previously looked at this issue around 2010 and concluded it was not workable. The regulatory and political environment have moved on since then and it will be interesting to see what suggestions emerge from the consultation process. However, the dearth of options set out in the consultation paper around how to achieve this suggest it may yet be returned to the “too difficult” pile.

As always with any levy review there will be winners and losers. For example, schemes sponsored by entities with “proximity to government” may see their levy fall whereas very large companies and those with non-investment grade ratings should be prepared for an increase. The impact will, of course, be scheme specific and trustees and employers may wish to start thinking with their advisers about how to maximise their position should the proposals come to fruition.