The PPF has announced an estimated Pension Protection Levy of £550m for 2012/2013 (the lowest levy that the PPF has set). It has also published its consultation on the 2012/13 levy framework.
The key changes proposed are:
- Levy parameters to be fixed for three years, intention being that there should only be changes to a scheme's levy if risk changes.
- Scheme-based levy to comprise a smaller proportion of the overall levy (11% of the total, as opposed to currently 20% ) and the risk-based levy proportion to increase to 89%.
- The risk-based levy to be capped to 0.75% of liabilities. PPF has stated that this will protect the weakest 9% of schemes.
- The "measurement date" (broadly, the reference date by which the levy is calculated) will be moved to immediately before the start of the Levy year, for the 2012/13 Levy it will be 30 March 2012.
- The current requirement for the guarantor, purchaser or chargor to a contingent asset to be "associated" with a scheme employer will be removed. However, a certification will be required to be made on Exchange certifying, broadly, that there is a "genuine" and "sufficiently strong" connection between the parties. The PPF expects that this should enable more schemes to put in place this type of guarantee as the previous rule has prevented parties who are not "connected", but had a legitimate interest in offering a guarantee, from doing so.
However, for Type A contingent assets (such as a standard PPF Guarantee), an additional requirement will be introduced requiring scheme trustees to certify on Exchange that the guarantor "could be expected to meet the full commitment under the guarantee if called upon to do so as at the date of the certificate". This will apply to new and existing guarantees. The PPF has stated that it has evidence to suggest that the financial strength of some guarantors may not be sufficient to meet the obligations and the certification requirement is intended to get more comfort that the guarantee does in practice reduce the risk of compensation payable by the PPF.
- A new factor, the "investment risk" to be used in the calculation of the underfunding risk of a scheme. For most schemes, the PPF will use the asset allocation information in the scheme return to assess this risk (making it more critical than ever that the information in the scheme return is accurate). For schemes with protected liabilities of £1.5bn or more, a bespoke analysis will be required.
- A new system for the insolvency risk of employers will be used. An employer's average D&B failure score over 12 months will be mapped into one of ten levy bands (instead of the current 100 Levy bands) - the PPF are of the view that fewer bands reflect the practical risk better. For the 2012/13 levy, the PPF will use monthly D&B failure scores from the end of April 2011 to the end of March 2012 (as opposed to, currently, the failure score on the measurement date).
The changes proposed to make contingent assets more accessible to schemes may be welcomed as this can assist with obtaining a reduction in their Levy. However, trustees will find the obligation to certify that the guarantor can stand behind its obligations more onerous, particularly as the certificate is required for existing guarantees and the trustees would have to review these if the suggested changes came into force.