The Pension Protection Fund (PPF) has announced the outcome of its consultation on the second PPF Levy Triennium (2015/16 to 2017/18) and the levy estimate for 2015/16. In our September Newsletter, we detailed a number of significant proposed changes to the PPF levy regime in the PPF’s consultation. The announcement sets out which proposals are to be adopted and highlights which proposals are to be modified.
The PPF has also announced a reduced levy estimate for 2015/16 to £635 million, being 10% lower than the 2014/15 levy estimate. Further good news for defined benefit schemes and their employers - the PPF expects further reductions in the levy estimate over the next two years.
In terms of the future levy regime, the headline points from the consultation outcome for schemes and employers are:
- The PPF-specific model. There was strong support for a PPF-specific model and, subject to a number of adjustments, the model the PPF created with Experian is largely being adopted. Consultation responses indicated the new model is considered to be more transparent and predictive of insolvency.
- Asset-backed contributions. Schemes wishing to have asset-backed contributions taken into account in the assessment of the levy will be required to obtain a valuation of the underlying asset on an insolvency basis. This is a significant change from the consultation in which the PPF proposed only to recognise asset-backed contributions where the underlying asset was UK property.
- Mortgage age. The PPF considers that mortgage age is generally a good indicator of insolvency risk but acknowledges that in certain circumstances this will not be the case, for example, rental deposit deeds, charges to the scheme and where a sponsor has improved its credit rating to be able to refinance on better terms. Under the new levy regime there will be a mechanism for self-certification so that ‘black marks’ may be disallowed for these types of relatively junior mortgage.
The PPF will adopt its consultation proposals in respect of:
- Associated last man standing schemes. The PPF will implement a sliding scale reduction of up to 10% depending on the dispersal of members between the scheme employers and trustees must confirm that advice has been taken in respect of the scheme structure.
- Type A contingent assets. Trustees will be required to certify each contingent asset on the basis of a specific cash sum which the trustees believe the guarantor could provide in the event of insolvency.
- Banding. The PPF will keep the ten-band system proposed, with 20% of the lowest risk employers in the first band, 10% in each of the next 7 bands and the last two bands each having 5% of the higher risk employers. There will be some small changes to proposed band boundaries.
The PPF has decided not to implement the proposed:
- Credit-rating override whereby entities with a credit rating would see their credit rating converted to a PPF insolvency score; and
- Transitional protection whereby some protection would be given to those schemes which would have seen the greatest rise in their levy following the changes.
There are many changes to take into account in advance of the 2015/16 levy year. We would suggest trustees and employers access the PPF’s portal and review their scheme data as soon as possible in order to have sufficient time to make any changes to ensure that their levy is minimised . In particular, employer data should be checked prior to 31 October 2014, because the insolvency risk begins to be measured on data from this date. Those that have recently accessed the portal should recheck to see what impact the consultation outcome will have on their levy. Trustees and employers should also consider with their advisers whether they will need to undertake any valuation or certification processes.