This update looks at the Pension Protection Fund Levy determination for the PPF Levy Year 1 April 2016 to 31 March 2017.

In particular, we look at whether there are any action points which pension scheme trustees should be taking as a consequence of the levy determination and the associated guidance.

The PPF estimate for the 2016/17 levy year is £615m. This represents a reduction on the 2015/16 estimate which was £635m. This is the second levy year where Employers are assessed by reference to the PPF specific measure of insolvency risk as designed by Experian. Given that we are in the second year of the current levy triennium, relatively little change in the process for this year has been made.

The main message from the 2016/17 levy policy statement is that it is business as usual. This is the second year of the current levy triennium so any changes are relatively minimal. The PPF has said that this year it will start looking ahead to the third triennium (beginning 2018).

The PPF has made some minor changes as a consequence of the consultation on the draft levy determination. These include the following:

  • Entities that have no secured borrowing because there is an absolute prohibition on borrowing in their governing constitution will be able to certify that this is the case. This means that they will be given a zero score on mortgage ages.
  • In certifying Asset Backed Contribution structures, a valuer will be able to certify an ABC at "no less than £X" rather than certifying a specific figure.

The procedure for certifying contingent assets this year is broadly the same as last year. Therefore, Trustees will need to ensure that existing contingent assets are recertified via Exchange no later than 5pm on Thursday 31st March. Last year, the PPF introduced a requirement that when certifying a type A contingent asset, Trustees must provide a statement as to the amount which the trustees are reasonably satisfied that the guarantor could meet (or the value of any cap specified in the guarantee, if this is lower). This is referred to in the PPF guidance as the "realisable recovery." Trustees should not assume that the realisable recovery amount that was certified last year will be the same this year.

The PPF has said in its policy statement that it is still seeing a rejection in contingent assets submitted to it. The PPF guide to assessing guarantor strength will be updated and the PPF says that this is the best source of advice on what it is looking for. In the meantime, the PPF's policy statement identifies the following key issues:

  • Trustees should consider the knock-on effects of the employer's insolvency on the rest of the group
  • Trustees must understand the impact of employer insolvency and the guarantor having to pay out on the following:
    • Inter-company balances  
    • Pooled cash funds
    • Group-wide banking arrangements
  • Trustees should look behind intra-group arrangements (including trade terms and ownership/ licencing of IP) to consider the impact on the recoverable amount.
  • When considering the value of companies that might be sold, Trustees should ensure that the valuation selected reflects the circumstances a guarantor may face in disposing of an entity. There is the possibility that a distressed sale may take place.

Some of the PPF's main changes have been around simplifying the recertification process for asset backed contribution arrangements and for certain types of mortgage.

ABC- recertification

For schemes who are recertifying an asset backed contribution arrangement ("ABC"), Trustees will need to obtain a valuation for the purposes of the recertification. This valuation may either be an updated version of the existing valuation or a full valuation. Where an updated valuation is obtained, the valuer must: confirm that the previous valuation of the ABC asset was taken into account, opine on the current value of the ABC asset and accept a duty of care to the PPF in providing the opinion.

If the underlying legal positon remains the same since the ABC was last certified, then the ABC valuer can continue to rely on previously supplied legal advice. The trustees' legal advisers will need to confirm that their previous advice remains current and that no changes have been made to the terms of the ABC which may materially affect the basis on which the advice was given.

The PPF continues to require trustees, in respect of any ABC asset which consists of or includes real estate, to obtain a certificate of title in respect of the ABC assets. This requirement also applies where the ABC asset is a loan note issued by another group company. This has presented practical obstacles for many companies where the assets involved include numerous properties and therefore render the cost of obtaining certificates of title for each property prohibitive.

The PPF suggested in its consultation document that it is keeping under review the use of the ABC structure where loan notes are involved and the PPF has suggested that they may bring the levy recognition more into line with that of Type A contingent assets (guarantees) in the future. We will continue to monitor this position for the 2017/18 levy year.

For Trustees certifying an ABC for the first time or who do not wish to go through the full process for getting an ABC recognised but instead wish to get a particular value taken into account, the process is largely the same as set out in our note from January 2015. A copy of the update can be found here but please bear in mind that the deadlines should refer to 2016.

Recertification process on mortgages

Various types of mortgage certified for 2015/16 need not be notified for 16/17. Where a mortgage was certified on grounds of materiality then it will need to be rectified.  For any information about the PPF levy process including how to appeal your levy invoice, please contact Suzanne Burrell or your usual pensions contact.