The PPF announced in May 2011 that a new pension protection levy framework would apply from the 2012/13 levy year.  The purpose of the new framework is to achieve stability and predictability for levy payers by fixing the levy parameters for a three year period.  On 21 September 2011 the PPF published the latest consultation (which closes on 2 November 2011) on the detail of the new framework and confirmed the earlier announcement that the levy estimate for 2012/13 is £550m.   The final levy determination for 2012/13 is due to be published by the end of 2011.

Key features of the new framework: a quick reminder

The key features are summarised below:

  • Levy parameters (levy scaling factor, scheme-based levy multiplier and risk-based levy cap) will be fixed for three years. The parameters will only 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%.
  • Asset and liability values will be smoothed.
  • The investment risk associated with the scheme’s investment strategy will be taken into account.
  • Employers will be allocated to one of 10 insolvency bands based on their average insolvency score over a one year period. Where a scheme has more than one employer, each employer will be placed in a band and the weighted average of the applicable bands will be assigned to the scheme.  The banding structure is also adapted for “last man standing” schemes.
  • The contingent assets regime will generally continue to apply to the new levy framework but with a strengthening of the rules (see below).

2012/13 draft determination and supporting documents

The PPF has confirmed that despite the fact that the levy parameters are fixed for three years, it will continue (as required) to produce a yearly levy determination.  Key points to note from the 2012/13 draft determination and draft guidance for the bespoke calculation of investment risk are as follows:

  • Contingent assets: schemes which have put in place type A assets (group company guarantees), or which seek to put them in place in the future, will be required to certify on Exchange “that guarantors could be expected to meet their full commitment under the contingent asset if called upon to do so as at the date of the certificate”.
  • Partial block transfers: the process for reporting partial block transfers is being removed as a result in the change to levy measurement date and resulting operational complexity.  Schemes involved in partial transfers which do not submit an updated section 179 valuation for the relevant year will have their levy calculated using the pre-transfer valuation.  The PPF expects that the apportionment of the levy should be a matter for the transferring and receiving schemes.
  • Investment risk: the detail of the PPF’s approach to investment risk (non-bespoke basis) is contained in the Determination’s Transformations Appendix.  The value of the assets compared to the liabilities after the stress tests have been applied will be used to derive the stressed deficit.  The bespoke approach is mandatory for schemes with protected liabilities of £1.5bn, although other schemes may choose the bespoke approach. The bespoke assessment should be carried out annually. Once a scheme has chosen the bespoke approach, it should continue with that approach in the future.  The PPF does not require formal certification of bespoke results but this policy will be kept under review.
  • Insolvency scores: D&B failure scores will be determined monthly in order to ascertain the annual average score. All information provided to D&B by the end of any month will be used to update the score which applies the following month.  The PPF confirms that it is likely that D&B will introduce an updated methodology in the first three years of the fixed levy.

The PPF comments that the contingent asset, transfers and levy practice guidance will be published with the final determination.  The draft contingent asset guidance will, however, be available in the next few weeks.

Key dates for implementation of new levy

The following are the key dates for the 2012/13 levy year:

  • Insolvency risk: measured using average annual failure score assessed on last working day of the month between 28 April 2011 and 30 March 2012
  • Submit scheme return information: by 5pm on 30 March 2012 (information may be submitted from November 2011)
  • Reference period for funding smoothing: five years to 30 March 2012
  • Date to which section 179 valuations transformed: 31 March 2012
  • Certification and/or re-certification of contingent assets: 5pm on 30 March 2012
  • Certification of deficit reduction contributions: 5pm on 10 April 2012
  • Certification of full block transfers: 5pm 29 June 2012
  • Invoicing starts: Autumn 2012.

Comment

The new levy framework applies from the 2012/13 levy year.  However, the detail of the new levy provisions has not yet been finalised despite the fact that the final determination is due to be published by the end of the year.  Despite this, trustees and employers should start considering what action they may need to take as a result of the new levy framework.  In particular, those employers and trustees with group company guarantees in place may wish to review their arrangements to ensure that they will still be effective in reducing the scheme’s PPF levy should the PPF’s proposals come into force.   This is because group company guarantees may no longer be effective to reduce the scheme’s PPF levy where the guarantor does not have sufficient assets to stand behind the amount guaranteed on the certification date.