PPF 2013/14 levy proposals announced

The Pension Protection Fund (PPF) has published its levy estimate (£630m) and consultation on the proposed basis for the PPF levy for the 2013/14 levy year.  Due to the continuing economic conditions the actual levy to be collected for the 2012/13 levy year is also likely to be £630m, a 15% increase on the PPF's previous levy estimate of £550m. This speedbrief looks at the PPF's proposals.

PPF levy framework: a quick reminder

A new framework for the pension protection levy had applied to the 2012/13 levy year. The purpose of this new framework was to achieve stability and predictability for levy payers by fixing the levy parameters (levy scaling factor, scheme-based levy multiplier and risk-based levy cap) for a three year period.  The parameters are only to be revised where the levy estimate would otherwise:

  • exceed the levy ceiling for a given year;
  • result in the scheme-based levy estimate exceeding the statutory maximum of 20% of the total levy; or
  • vary from the previous year's estimate by more than 25%.

2013/14 levy estimate

The PPF has seen a substantial rise in risk over the last year as a result of falling gilt yields depressing scheme funding as well as the recognition that some parent company guarantees offer less protection than they appeared to.  These risk changes would have led the PPF, using the 2012/13 levy parameters, to set a levy estimate for 2013/14 of £765m, breaching the legislative restriction that a levy estimate cannot be more than 25% higher than the previous year's estimate.

The PPF's levy estimate of £630m for 2013/14 is lower than the maximum possible estimate of £687.5m. This figure is "a balance between the need to charge an appropriate levy for the increased risk we face and recognition of the challenging environment for pension schemes".  It is also the figure that the PPF expects to collect in levy payments for the 2012/13 levy year.

2013/14 levy proposals

The PPF's proposals are in many respects similar to those which applied for the 2012/13 levy year.  However, particular points to note are set out below.

  • The levy scaling factor and the scheme-based levy multiplier are being reduced.  Whilst the risk-based levy cap remains unchanged, the reduction to the other two parameters means that fewer schemes will have their levy capped.
  • The stress factors applicable to assets and liabilities remain unchanged.
  • The deadline for the submission of deficit reduction certificates will be extended to 30 April 2013.
  • The minimum financial strength of an institution which provides a bank guarantee, letter of credit or custodianship for a contingent asset comprising security over property or other assets has been weakened from AA- to A-.

The PPF also plans to revise its guidance on the requirement that a guarantor under a contingent asset is "good for the money".  The PPF comments that it had been prepared to give schemes the benefit of the doubt for the 2012/13 levy year but it is not clear, since the revised guidance has not yet been published, to what extent this approach will differ for the 2013/14 levy year.

The PPF notes in its consultation document that it expects that around 70% of schemes will see a change (either increase or decrease) in their levy of more than 5%. 20% of schemes will see a levy increase of more than 15%.

2013/14 levy deadlines

The proposed deadlines for provision of information for the 2013/14 levy year are:

  • D&B failure scores assessed: between 30 April 2012 and 28 March 2013
  • Exchange opens for submission of scheme returns: December 2012
  • Submit scheme returns on Exchange: 5pm on 28 March 2013
  • Reference period for funding smoothing: 5 year period to 31 March 2013
  • Certification of contingent assets: 5pm on 28 March 2013
  • Certification of deficit-reduction contributions: 5pm on 30 April 2013
  • Certification of full block transfers: 5pm on 28 June 2013
  • Invoicing starts: autumn 2013

Future levy rates

The PPF confirmed in its consultation document that it had kept the levy for the 2013/14 year to the level it expects to collect for the 2012/13 year (£630m).  The PPF noted, however, that should the current economic conditions continue, it expects to increase the levy in 2014/15 and thereafter.  Its consultation closes on 2 November 2012.

Comment

The PPF's decision to fix levy parameters in order to achieve stability was laudable.  It is unfortunate that the continuing challenging economic conditions have meant that the parameters have had to be altered so soon.  Employers and trustees will no doubt welcome the fact that the PPF has set a lower levy estimate than it might have done.  They will, however, be keen to explore ways in which their scheme levy may be reduced.