The Pension Protection Fund (PPF) has confirmed that the 2014/15 pension protection levy estimate will be £695 million, as proposed in September 2013. It has also published its Levy Determination for 2014/15 which sets out the Levy Rules.
The PPF has not revised its levy estimate of £695 million. However, it reiterates the point made in its September levy consultation that if developments in the wider economy lead to falling risk, then it will collect less than its estimate.
Calculating the levy
The parameters for calculating the levy will remain unchanged from last year:
- the levy scaling factor (used to finalise the risk-based element of the levy) will be 0.73 and
- the scheme-based levy multiplier will be 0.000056.
The cap on the risk-based levy will apply at 0.75% of smoothed liabilities.
New insolvency risk provider and new methodology
After the PPF launched its consultation on the levy, the current insolvency risk provider, Dun & Bradstreet (D&B), announced that it would be implementing a new scoring methodology from early 2014.
The PPF has decided not to change the Levy Rules to allow it to continue to use the old methodology and so will be using D&B’s new scoring methodology from the beginning of 2014. This means that failure scores generated under the new methodology will be used in the calculation of the annual average calculation in the same was as earlier failure scores.
The PPF states that, at present, it is not known how the scores generated by the new methodology will differ from under the current one. Schemes and advisors wanting to know more about the change are advised to contact D&B on 0870 850 6209.
The PPF announced in July 2013 that it would be switching insolvency risk provider from D&B to Experian from 2015/16, which coincides with the start of the next three-year period for the levy. The PPF has confirmed that it has started to liaise with Experian to develop a new scoring methodology. It is also working with an industry steering group to evaluate the new scoring methodology as part of a broader review of the levy and intends to hold a consultation on this in Spring 2014. There will be a familiarisation period during which schemes and employers can challenge the data held by Experian before it is used in the levy.
Further to the PPF’s consultation in September 2013 on two changes that would impact the way contingent assets are certified and re-certified, it has confirmed that:
- From 2014/15 a simplified re-certification procedure can be used for contingent assets where certification or re-certification has occurred not more than five years previously so long as the underlying agreement remains unchanged, and certain requirements are met. Previously it was only possible to recertify a contingent asset if it was certified in the immediate preceding levy year. This meant that contingent assets had to be re-certified even if it made no difference to the scheme’s levy that year, simply to avoid having to resubmit the contingent asset as “new” in later years.
- For 2014/15, trustees certifying a Type A contingent asset will need to continue to certify that they have ‘no reason to believe that each certified guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset as certified.’ However, from 2015/16, the certification will be relaxed so that trustees must be “reasonably satisfied” that each guarantor could meet its full commitment under the contingent asset.
The PPF remains concerned that some trustees in 2013/14 were prepared to certify guarantors whose assets were judged likely to be insufficient, because the guarantor’s strength depended on investments in, or money owed by, the sponsoring employers, so it will be updating its contingent asset guidance to reflect the experience of 2013/14 guarantor testing. The PPF is going to try to incorporate the thinking behind the wording change into any wider changes that may emerge from the 2014 consultation on the next three-year levy period.
Money purchase benefits
As we mentioned briefly in our December 2013 Pensions Newsletter, the DWP has recently published its consultation paper and draft regulations dealing with the practical effects of the revised definition of “money purchase benefits” in section 29 of the Pensions Act 2011. The definition was revised following Houldsworth and another v Bridge Trustees Ltd where the decision of the Supreme Court raised the possibility that benefits under a pension scheme could continue to be “money purchase benefits” even if a funding deficit could arise in relation to them. Section 29 amends the Pension Schemes Act 1993 to ensure that a benefit is only a money purchase benefit when it is calculated solely by reference to the assets (as opposed to some promise as to the size of the benefit), so the assets must always be sufficient by themselves to meet the liabilities.
In its September 2013 consultation, the PPF asked whether it should include a rule in the final Levy Determination that would allow it to recalculate levy invoices for 2014/15, for schemes affected by the DWP’s forthcoming regulations.
The PPF’s 2014/15 policy statement points out that the draft regulations do not provide for 2014/15 levy bills (or levy bills for prior years) to be revisited to take account of the section 29 definition. However, the draft regulations do require schemes previously wholly ineligible for the PPF to complete a section 179 valuation by 31 March 2015. Further, the PPF can require existing eligible schemes affected by section 29 to provide additional information in order to decide whether levy calculations from 2015/16 need to take into account additional liabilities or assets as a result of the legislative change.
In view of this development, the PPF’s current position is that it will not to include a rule allowing it to recalculate levy invoices for 2014/15. At the moment, it expects to only seek an updated section 179 valuation from schemes affected by section 29 where the effect is material, and only then in respect of the applicable years set out in the legislation. This position is not final, and the PPF is reserving its final decision until the draft regulations are published in final form in Spring 2014.
Key deadlines for the 2014/15 levy data and certification
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