The PPF has released its draft levy determination for 2015/16, together with its formal response to the levy consultation for the 2015/16 to 2017/18 “triennium”. The outcome broadly confirms the PPF’s proposals earlier in the year. However, there is some relaxation of the PPF’s initial proposals in relation to recognition of asset-backed contributions (ABCs), which will be welcomed by a number of schemes.
The original proposals
By way of reminder, the PPF consulted in May on a new “PPF-specific” model for calculating the PPF levy. Developed with Experian, the new model is intended to provide greater predictive accuracy in assessing insolvency risk, producing scores based more closely on financial data. The new scores are to be used from October 2014, with a six-month average used to calculate the levy for 2015/16.
The consultation also asked for views on:
- a new test for “Type A” guarantees used to secure a levy reduction, with a requirement for trustees to certify a fixed sum that they believe the guarantor could pay if the guarantee was called upon;
- a levy discount for associated last man standing schemes to reflect the extent to which the arrangement genuinely spreads risk, rather than a standard discount of 10%;
- whether schemes facing significant levy increases should be afforded some form of transitional protection; and
- a new approach to ABCs to ensure that recognition was proportionate to the reduction in the PPF’s risk (but which essentially restricted recognition to UK property assets).
In relation to ABCs, in a key move away from its original proposals, the PPF will now recognise all asset types for the purposes of the levy “provided the ABC is valued in a way that reflects the value to the PPF in the event of insolvency”. The value of the ABC arrangement will be removed from the scheme assets when calculating the section 179 deficit, but a PPF-specific “ABC value” will then be added back in for arrangements which meet the PPF’s requirements. Trustees will have to certify a value for their interest in the ABC vehicle, which will be the lower of the fair value given in the scheme accounts and a stressed value for the underlying ABC assets, calculated on the assumption that all the scheme employers (and any guarantors) are insolvent. This value needs to be obtained from a professional valuer and supported by a legal opinion about the trustees’ rights under the ABC arrangement.
These proposals should mean that most ABC arrangements will now receive recognition in the PPF levy calculation. However, the requirements for professional valuations and legal opinions may be quite onerous in many cases and some structures will still fall outside the levy entirely, such as where the ABC arrangement holds a loan note from the employer group and the assets supporting that loan note are not subject to security in the form of a fixed or floating charge.
Otherwise, the response broadly confirms the proposals in relation to the new PPF-specific model, the treatment of Type A guarantees, and the discount for last man standing schemes. The PPF has also decided not to provide transitional protection to those schemes which had been expected to see the most significant movements in levy.
With PPF specific-scoring on its way from 2015/16, the PPF takes the opportunity to call on all schemes and employers to understand the new rules, and to check their new scores, before 31 October.
Links to all the draft 2015/16 documents released so far can be found here.