Many schemes will see a sharp increase in their levy next year  as a result of the PPF’s new and more discriminative insolvency  scoring system.

To give you an idea, the PPF expects:

  • „ £200m of levy will be redistributed (some 30% based on  this year’s figures), over half of it as a result of employers  dropping 5 or more of the 10 insolvency bands, 
  • „ 1,500 schemes to have an average increase in levy of 150%, 
  • „ 200 to have an increase over £200,000, with some  apparently in the millions and 
  • „ a third of schemes to see a reduction of an average of 40%.

Trustees and, in particular, employers need to understand how  the new system will work and to consider what steps they can  take to contain their levy.   

The new insolvency scoring system is the main subject of a  consultation about the broad levy framework for the next three  years, 2015/16 to 2017/18.  The closing date is 9 July.  If  your scheme will be affected significantly, you should consider  sending in a response.       

In September, the PPF will carry out its annual consultation on  the detail of the levy rules for 2015/16.      

Other proposals

The consultation also proposes changes in relation to:

  • „ the not-for-profit sector, 
  • „ the recognition of asset-backed funding arrangements,
  • „ type A contingent asset guarantees and
  • „ last man standing schemes.

These proposals will also have a significant impact on levy bills.   See below for more.   

Experian replaces D&B

Experian has created a scoring system specific to the  characteristics of the sponsors of DB schemes e.g. typically  larger, longer established and more often part of a group than  most UK businesses. The system has a strong focus financial  data and takes no account of the non-financial indicators of the  type used by D&B, like industry sector, geographical location  and board composition. Overdue trade bills matter only for  small standalone businesses.

Sponsors are allocated to one of eight categories according to  whether they are commercial or not-for-profit, part of a group  or standalone and according to size. Each category has its own  scorecard consisting of category-specific financial variables  with different weightings towards the overall score.  

For groups, the new system takes considerably more account  (up to a top weighting of 33%) of the strength or weakness of  the ultimate parent company than D&B’s method.    

Customer service 

The new system will be transparent and user friendly.   Employers will have free online access to the data Experian  holds on them and to their score, making it easier to ensure  information is correct and up to date.  An email will alert them if  their score changes. 

Transition

The PPF invites views on whether it should offer transitional  protection (for one year) to the schemes most affected by the  changes. It suggests a reduction in levy (amount unspecified)  where an employer’s insolvency risk is more that 200% higher  than for the current levy year. It estimates this would add up to  £100m of levy.    

For levy year 2015/16, an employer’s final insolvency score will  be the average of the six monthly scores from October 2014 to  March 2015 (instead of the usual 12 month average). 

Other issues 

The PPF also invites for views on the following proposals that  will also have marked effects on individual levy bills.

  • It accepts that a scoring system designed for commercial  enterprises is unsuitable for not-for-profit organisations  (NFPs).  So it proposes a dedicated scorecard and makes  suggestions about how to define an NFP.
  • For the largest employers (assets over £500m), should the  Experian score be overridden by a credit rating from one of  the leading agencies (Moody’s, Standard & Poor’s or Fitch)?   This question arises because the Experian system is less  accurate for this category than for others.  If adopted, the  override would apply whether it produced a more or less  favourable result for an employer.  
  • An asset-backed funding (ABF) arrangement will not be  recognised as a general scheme asset.  Instead it will be  subject to separate certification at the lower of the NPV  of future cashflow and the value of the underlying asset  on insolvency.  
  • In addition, the underlying asset will be restricted to  the same classes as the PPF accepts for the closest  analogy among the contingent assets it accepts (secured  guarantees), being cash, securities and UK real estate.  In  practice, the PPF accepts this is likely to mean recognised  ABFs will be confined to real estate.  
  • „ The PPF remains dissatisfied with the strength of covenant  behind some parent guarantees submitted as contingent  assets.  It is considering tightening the requirements using  one or more of these approaches:
    • be clearer about the value in issue by requiring  trustees to certify the guarantor can meet a specific  cash sum on an immediate group wide insolvency  (rather than an amount opaquely defined by reference  to an actuarial basis),    
    • the insolvency scoring system for groups will give  considerable weight to the strength or weakness of the  ultimate parent company. The PPF believes this could  reduce the incentive for putting guarantees in place,  and
    • treat a guarantee as increasing the guarantor’s gearing,  giving it a higher insolvency risk score.
  • To sharpen the requirements in relation to last man standing  schemes, the PPF proposes to require a certificate, based  on legal advice, that a scheme is indeed last man standing.   Secondly, it proposes to develop a scheme specific  discount factor to replace the current uniform 10%. 

The consultation documents (which include YouTube videos)  are available here:  http://www.pensionprotectionfund.org. uk/levy/Pages/PensionProtectionLevy.aspx