Following its March consultation on the PPF levy framework, as part of its policy statement on the third levy triennium, the PPF has published draft rules on calculating levies for the next three years.
The proposed changes could leave larger employers paying a higher levy, while up to two thirds of schemes will see a reduction, with the aggregate PPF collection target falling by 10%.
New model documents for contingent assets have been introduced, but need not be used for existing contingent assets until 2019/20.
Key changes include:
Assessing risk and scorecards
The PPF will be adopting changes to the scorecards used to assess the risk of a sponsoring employer’s insolvency. Schemes with sponsoring employers in the stronger bands are deemed a lower risk to the PPF and so pay lower levies than those in the higher bands:
- Employers with formal credit ratings will be placed in a levy band based upon their credit rating – the aim is to more accurately reflect insolvency risk and result in more proportionate levy charges
- Employers without a credit rating currently scored using the Large and Complex or Independent scorecards will now be moved to new scorecards that will most likely result in an increased levy. For example, the new scorecard for companies with an annual turnover of above £30m, including many Group Parent companies, will see a significant worsening of their levy band.
- The scorecard adjustments will mean that SMEs will in aggregate see a reduction in levy in the region of 30%, as they will no longer be scored alongside some large employers.
Certifying risk reduction
The PPF will also adopt the proposed simplifications to the certification of deficit reduction contributions. Small schemes with liabilities of below £10m will have the option to use recovery plan payments in straightforward circumstances. Schemes will also not have to account for investment expenses, an often costly and time consuming exercise.
A guarantor strength report will be needed from an independent advisor for schemes where the expected levy saving from a PPF guarantee is £100,000 or more. This independent advisor owes a duty of care to the PPF. However, in light of the March consultation it is now proposing that, for already-existing contingent assets, the requirement to draw up new agreements based on the amended model templates introduced now, will be deferred until the 2019/20 levy year.
Allowance for good governance
The consultation exercise involved seeking views on the possibility of a levy reduction for good governance, though this was deemed too much of an objective standard to translate into a levy factor.
It was also concluded that a reduction in the administrative burden would be favoured over the designation of differing levy rules for smaller schemes.
Scheme employers should ensure they understand their PPF levy and how these new changes will affect them, especially as the period from which the PPF will calculate a scheme’s levy started 31 October 2017.