The Pension Protection Fund (PPF) has issued a consultation paper on its plans for the PPF levy over the three years from 2015/16 onwards. The proposed changes could result in a significant increase (or decrease) in a scheme's PPF levy.

New insolvency risk model

Dun & Bradstreet was recently replaced by Experian as the PPF's insolvency risk services provider. The PPF is now proposing to move to a new PPF-specific model developed by Experian.

The new model will be based on the experience of sponsors of defined benefit pension schemes rather than the average UK business. It will also be very largely based on financial information rather than non-financial factors such as the number of directors on the company's board. The PPF believes that the new model will be more accurate, stable, transparent and resistant to manipulation.

There will be a free web portal which allows trustees (and other scheme representatives authorised by them) to view their employers' monthly scores. The PPF is also looking to develop a solution to allow employers to access information about their score, at employer level.

Users will be able to download "what if" reports which allow them to see how an employer's score is affected if particular input variables change. They will also be able to set up automated alerts when their score changes as a result of changes to input data (such as new accounts information).

A couple of aspects of the new model which the PPF is consulting on include:

  • Not-for-profit entities - the PPF has constructed a separate scorecard for not-for-profit entities and welcomes feedback on who should count as a "not for profit" entity and be scored under this alternative scorecard.
  • Credit ratings - the PPF is considering whether there should be an override for entities with a credit rating. The entity's PPF specific score would be replaced by a score calculated using the default probability implied by their credit rating.

Banding system

The 10 band system for insolvency risk is set to continue. The top band will contain 20% of employers, bands 2 to 8 will each have 10% of employers and the bottom 2 bands will each have around 5% of employers.The PPF is considering reducing the total number of bands to 8 and having a broader top band which covers around the top 40% of employers. It has asked stakeholders which of these two approaches they favour.

No transitional protection

Some schemes may see their PPF levy dramatically increase as a result of the changes. The PPF says in its consultation paper that it has decided against introducing any transitional protection. It thinks it would be unfair to require companies who should be paying a lower levy under the new regime to meet the cost of transitional protection.

Although the PPF is not proposing transitional measures, it has developed an option it could implement if it had "broad stakeholder support". This would involve comparing the insolvency risk that was calculated for a scheme in 2014/15 with what the assessment would have been had Experian scores been used in 2014/15.

If the increase is more than 200% the PPF would abate the 2015/16 levy bill. Transitional protection would only last one year and would effectively be funded by a cross-subsidy, with the scheme based levy increasing for all schemes.

Asset backed contributions (ABCs)

The PPF is concerned that some schemes with ABCs may pay a substantially lower PPF levy than is appropriate based on the risk they pose to the PPF. This is because there is no requirement for the underlying asset to have a value equal to the net present value of future cashflows, nor for consideration of whether that value may reduce on employer insolvency.

Currently ABCs are typically included in scheme assets reported through s179 valuations and valued in line with the accounts valuation based on an assessment of the net present value of future cashflows from the ABC.

In future the PPF proposes to remove any value attributed in the scheme accounts from the s179 asset value and instead allow schemes to submit a voluntary form certifying the ABC. This certification would provide recognition of the lower of the insolvency value of the underlying asset or the net present value of future cashflows. Schemes will need to certify annually and carry out a valuation of the underlying asset on an insolvency basis every three years.

The PPF proposes that only UK property based ABCs will be recognised for the purposes of the levy. It appears that "property" could be limited to real estate. This is because the PPF believes there are inherent difficulties in valuing more intangible assets and there is a well-developed basis for professional valuation of UK property and a robust approach to valuation in the event of employer insolvency. The PPF says that if stakeholders want to make a case for wider recognition of underlying ABC assets, these issues would need to be addressed.

Parent company guarantees

The PPF's experience is that recovery from a guarantor has generally proved negligible and that "there is a strengthening case for removing recognition of type A contingent assets altogether for future years". However, as this would be a significant departure from their policy of recognising risk-reduction measures, the PPF is seeking to develop options to allow the contingent asset regime to continue.

The PPF says that the new scorecards, with their recognition of parental strength or weakness reduce the incentive for putting contingent assets in place, where this is simply to reflect variations in score across the group.

In future the PPF proposes to require trustees to certify a fixed amount which they are confident the guarantor could pay if called upon. It also proposes to adjust guarantor scores to reflect the value of the guarantee they are potentially liable for.

Last man standing schemes

Last man standing schemes are multi-employer arrangements which do not have an option or requirement to segregate assets on the cessation of any participating employer. Such schemes currently pay a lower PPF levy than a comparable segregated arrangement because they pose a lower risk to the PPF.

The PPF has concerns over significant misreporting of scheme structure so it is considering whether to require confirmation that legal advice has been taken on the scheme structure claimed. The PPF also proposes that the discount given for such schemes reflects the extent to which the arrangement is genuinely spreading the risk, rather than being a single standard discount.

What does this mean for employers and trustees?

Employers

  • Be aware of the proposed changes to the PPF levy and the potential impact on you.
  • Would you benefit from the one year transitional period outlined as an option by the PPF? If so, consider making representations to the PPF.
  • If you have an ABC, note the proposed changes in relation to valuations. You will need to certify on an annual basis and carry out a valuation of the underlying asset on an insolvency basis every three years.
  • If the underlying asset in your ABC is something other than UK property, consider making representations to the PPF for the class of asset to be recognised.
  • Do you have a last man standing scheme? You may be required to get legal confirmation of this scheme structure. The discount you receive on the PPF levy will in future reflect the extent to which the arrangement is genuinely spreading risk.

Trustees

  • If your scheme has a PPF parent company guarantee in place, you may be required to certify a fixed amount which you are confident the guarantor could pay if called upon. Take professional advice .
  • Log on to the web portal and check your data. If you have any queries in relation to this data, contact Experian via their customer service details as shown on the website

Note that the consultation period ends on 9 July 2014.