PPF levy: a reminder
The Pension Protection Fund (PPF) is funded by a levy on eligible schemes. The levy consists of the administration and the pension protection levy. The pension protection levy is made up of the scheme-based levy and the risk-based levy.
The risk-based levy requires the PPF to consider the level of scheme underfunding and the likelihood of employer insolvency. A scheme is underfunded if the certificate submitted to the PPF shows that it has a deficit on the section 179 basis. The likelihood of employer insolvency is assessed by Dun & Bradstreet as at 31 March (D&B) on a scale of one – 100 (one being the most likely to fail and 100 being the least).
Each year the PPF issues a determination which sets out how the levy for the next levy year will be calculated. In 2006/07, the PPF said that it would calculate the risk-based levy using the failure rating information in relation to the largest participating employer. However, the PPF allowed schemes to provide information about its structure on a voluntary basis. D&B would use this information to determine the likelihood of employer insolvency.
High-Point Rendel case: the facts
High-Point Rendel Limited (Limited) is a wholly-owned subsidiary of High-Point Rendel Group PLC (PLC) which is in turn a wholly owned subsidiary of High-Point Rendel Holdings Limited (Holdings).
PLC was the principal employer of the Scheme. The employer with the most members in the Scheme was Limited.
In October 2006 the PPF issued a levy invoice for £230,990.14 of which £224,698.58 represented risk-based levy. The PPF commented that Limited was the employer with the most scheme members and that this company had a failure score of six.
The trustees of the Scheme applied for a review of the D&B rating on the basis that the failure score should have been based on Holdings since Limited was a wholly-owned subsidiary and could not be seen as a stand alone company for credit purposes; the strength of Limited was derived from the strength of the group in particular, Holdings. The D&B failure score for Holdings is 81.
The trustees said that the PPF had misunderstood the relationship between the group companies. Indeed, Limited had been re-rated in 2007 as a result of a re-assessment of the corporate structure. They argued that as Limited had been re-rated in 2007 it would be unjust for D&B not to adjust the 2006 score to take account the new understanding of the group structure which had not changed over the period in question.
The trustees argued before the Pension Protection Fund Ombudsman (PPFO) that D&B’s methodology was flawed when dealing with small companies. For example, Limited had a County Court judgement which had reduced its score from 37 to six. This judgement has subsequently been cleared. In addition, the trustees said that the failure score had been overly influenced by supplier feedback. In particular, a small number of suppliers which gave negative feedback had a disproportionate effect on the score since most of the costs in relation to Limited related to salaries for its employees.
High-Point Rendel case: the decision
The PPFO rejected the trustees’ arguments. The PPFO considered that the question which needed to be resolved related to the actual calculation of the risk-based levy and not the way in which the levy methodology should be determined.
The PPFO commented that Limited had not submitted to the PPF the form which would have declared the Scheme’s structure or identified the Scheme’s participating employers. The employer with the largest number of employees on the scheme return was Limited. As a result the risk-based levy had been correctly calculated and the appeal rejected.
The key lesson for trustees from this decision is that prevention is better than cure. The decision demonstrates the rigid process the PPF follows in determining all aspects of the risk-based levy, including the D&B failure scores. The PPFO focused on the fact that the trustees had not completed the declaration of structure or identified the Scheme’s participating employers. It was this failure which meant that the D&B failure score would not be reassessed. The score had been determined in accordance with the information available to the D&B and the resulting levy amount calculated in accordance with published methodology. It is, therefore, essential:
- To ensure that all relevant forms and information is submitted by the deadline because they will not be accepted later.
- To consider the advantages of using contingent assets making sure that the appropriate forms and documentation is submitted to the PPF in time.
- To monitor and address those factors that could contribute to a low D&B score where contingent assets are not used.
- To challenge promptly D&B scores that do not appear to reflect the company’s financial position. In our experience, significant changes can be made to D&B scores in these circumstances.
With potential increases in the amount to be raised from the risk-based levy, these aspects could assume increasing importance in the coming months.
This analysis is based on decision R00604 by the Deputy Pension Protection Fund Ombudsman in relation to the High- Point Rendel Pension Plan.