If you sponsor a defined benefit pension scheme, you will be well aware of the costs associated with funding the scheme and making sure all regulatory requirements are met. One of the costs (unless the scheme is not eligible for PPF protection) is the annual PPF levy. But is the PPF levy for your scheme fair? Does it reflect the true risk of the scheme ever becoming a burden to the PPF? The answer is often no, which means many schemes are paying too much for their PPF levy. We can help.
What's the problem?
The main issue lies with the risk-based element of the levy, which typically accounts for the bulk of any levy invoice. One of the key elements in calculating the risk-based levy is assessing the likelihood of an insolvency event occurring in relation to the employer. The PPF uses its agent, Dun & Bradstreet (D&B) (which will be replaced by Experian in 2015), to assess this likelihood. If D&B or Experian fails to take into account the appropriate data when calculating the likelihood of the employer's insolvency, this can lead to schemes being hit with an inflated risk-based levy.
The PPF has recently published its response to the consultation on the new PPF-specific system of risk scoring, which could significantly impact a scheme's risk-based levy. Under the new system, instead of being designated a "failure score", companies will be allocated a scorecard within a range of insolvency probabilities, which will then be used to create a series of 10 bands. A levy rate will be assigned to each band. The information used to determine the "band" for each employer is also changing. It is therefore critical that schemes and employers understand what information is relevant when bands are allocated and make sure it is available and accurate.
Contingent asset arrangements
In other cases, schemes are not aware of or have not taken advantage of putting in place a PPF-compliant contingent asset arrangement. If a scheme has the benefit of a parent company guarantee or a charge over property, or potentially has access to such security, this can often be used to reduce the PPF levy provided the security is structured in the correct way.