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Breaking News

November 2011 – PPF announces changes to contingent asset guidance for 2012/13 levy

The Pension Protection Fund (“PPF”) has published its draft guidance on contingent assets to be used in the 2012/13 levy calculation. This has a number of changes compared to previous versions, in particular in relation to Type A contingent assets (i.e. group/parent guarantees). The final guidance is expected to be released in December.

Additional certification requirement for Type A contingent assets

The PPF has strengthened the certification requirement in relation to Type A guarantees and will now require Trustees to certify the following.

“The trustees have no reason to believe that each guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset.”

Trustees will be required to make this assessment every year and provide the certificate via Exchange.

How should trustees decide whether or not to provide the certificate?

The certification has been phrased negatively (i.e. “no reason to believe”); this should allow trustees to make the assessment without the need for absolute certainty.

The PPF has noted that it does not generally expect trustees to undertake a covenant review of the guarantor. However, they do require trustees take “proportionate and reasonable steps to reassure themselves as to whether the guarantor has sufficient value as a business”.

To assess the value of the guarantor’s business the PPF has suggested trustees consider some or all of the following:

  • The guarantor’s latest set of audited accounts (both balance sheet and income statement).
  • Any relevant events that have occurred since the date of the latest audited accounts.
  • The ability of the guarantor to borrow money.
  • The view of the finance director of the guarantor.
  • Whether they can obtain confirmation from the guarantor that it will supply relevant information that is not publicly available.

If trustees are unable to satisfy themselves that the guarantor can meet the full amount under the guarantee, they have the option to certify a lower amount; this will not change the actual contingent asset agreement, just the amount used for the PPF levy calculation.

The PPF’s assessment of the guarantor’s strength

The PPF will be performing its own analysis of the strength of the guarantor; if it comes to the view that a guarantor could not meet the full amount certified then the guarantee will not be used in the levy calculation.

To do this the PPF will, in the first instance, look at the net asset position of the guarantor in its latest accounts and compare this with to the amount being certified. The PPF has stated that as this is the first year with these rules in place it will generally give the benefit of the doubt to schemes. In particular, it expects the only challenge guarantees where the net assets are “somewhat below the sum guaranteed”.

The PPF may request trustees supply evidence of how they came to their decision on the strength of the guarantor; we would therefore advise that trustees discuss this matter and document their findings.


September 2011 – PPF Announces £550m levy estimate

The Pension Protection Fund (PPF) has published its proposals for calculating the 2012/13 levy under a new levy framework which will be fixed for the next three years in a bid to provide stability and predictability in the PPF levy.

The rules remain largely unchanged from the policy statement issued in May. However, schemes that are looking to recertify or are considering putting in place a ‘Type A’ guarantee must now confirm that the guarantor could meet in full the guaranteed amount at the certification date.

A summary of the levy parameters that the PPF intends to apply under the new proposals for the next three years is as follows:

1) The PPF Board is proposing a total levy bill for 2012/13 will be £550 million (£50 million lower than last year). The PPF has taken a range of factors in determining in the amount it collects including on the one hand the improved financial position of the fund and the effect of PPF compensation now being increased in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) but also considering the uncertain economic outlook following the global financial crisis. The PPF expects to raise £550 million in 2013/14 and 2014/15 and they expect to do so by keeping the levy scaling factor, the scheme-based multiplier and risk-based levy cap constant.

2) The levy scaling factor (LSF) is expected to be 0.89 for 2012/13 to 2014/15.

3) Scheme-based levy multiplier (SLM) is expected to be 0.000085 for 2012/13 to 2014/15.

4) The cap on the risk-based levy will be maintained at 0.75% of liabilities.

The PPF would need to adjust the above levy parameters if the levy estimate would otherwise:
• breach the legislative ceiling for total levies to be collected;
• result in the risk-based levies being collected being less than 80 per cent of the total; or
• vary from the previous year’s estimate by more than 25 per cent.

Although the proposals are still under consultation and subject to change, historically very few changes have been made at this final stage in the consultation process. As a result, schemes should now be able to obtain estimates of their 2012/13 levy.


May 2011 – New levy framework confirmed

The Pension Protection Fund (PPF) has published a policy statement confirming changes to the levy formula which will affect levies from 2012/13. The statement follows proposals originally made by a “Steering Group” of pensions experts in March 2010, and a consultation that began in October 2010.

There are a number of relatively minor differences between the final policy statement and the original consultation. The most significant changes to levies before and after 2012/13 are:
  • The levy formula will be fixed for three years at a time. This “bottom-up” approach will mean that there is a clear link between the risk posed by a scheme and the levy paid so that individual levies will be largely independent of changes in other schemes’ risk profiles.
  • Funding will be smoothed based on a moving average of indices over a five year period
  • Investment risk will be allowed for in one of two ways:
    - by building in a standard “stress” to the scheme’s asset value used in the levy calculation. The stresses will vary by asset class. The PPF will use data already being submitted to Exchange, and hence expects that there will be no additional reporting requirements.
    - Using a bespoke calculation which will be carried out by the Scheme Actuary. This will be mandatory for schemes with section 179 liabilities of £1.5 billion or more, and optional for all others. The PPF has issued draft guidance on this approach for consultation which closes on 24 June 2011.
  • The Insolvency Risk will be based on an unweighted average of the failure scores at the end of each month for the preceding year. The failure score will be allocated to one of ten bands (the October 2010 consultation proposed six bands).
  • The insolvency probability will be capped at 4% and the risk based levy will be capped as a percentage of liabilities.


Further details will be added to our website here.


January 2011

The PPF has confirmed that following the consultation, it will be implementing changes to the levy structure for the 2012/13 levy onwards. A full policy document is expected to be released in late April and more details will be provided at that time.

The PPF will use data submitted via Exchange on or before 31 March 2011 to set the scaling factor for 2012/13 so it is still important that any relevant information is submitted ahead of this deadline. The deadline for other information will be 31 March 2012. It is proposed that the probability of insolvency for the 2012/13 levy will be calculated using an average of the D&B failure scores at the end of each month from 30 April 2011 to 31 March 2012. It is therefore important for companies to consider strategies for improving their failure score ahead of 30 April 2011. Implementing a regular monitoring strategy is also a consideration following these changes. To obtain more details on Barnett Waddingham’s services, please click here.

October 2010 - The Pension Protection Levy: A New Framework

The PPF has published a consultation document on changes to the levy formula which will apply for levy years from 2012/13 onwards. This follows three years of work examining the options which included seeking views from a Steering Group of pensions experts. The most significant changes proposed in the consultation are:

  • The levy formula will be fixed for three years at a time
  • Funding will be smoothed based on a moving average of indices over a five year period
  • Investment risk will be allowed for by building in a “stress”, which will vary by asset class, to the roll-forward formula
  • Insolvency risk will be based on fewer bands which are designed to better reflect market perception of default risk and the PPF’s own claims experience. The insolvency risk will be based on an average over the 12 months leading up to the relevant levy date.
  • The insolvency probability will be capped as will the risk based levy by size of liabilities.

What will be the impact on levies?

The PPF believes that the following types of scheme will be “winners” and “losers” compared to the 2011/12 levy formula:

  • Schemes with strong funding positions will generally pay a lower levy and schemes with very high funding levels will see decreases regardless of insolvency risk.
  • Schemes with strong employers but which are not well funded would tend to pay more – presumably by “not well funded” they mean after the smoothing and stresses have been applied.
  • Schemes with weaker employers would tend to pay less with the exception of poorly funded schemes which would tend to pay more.

The consultation contains charts showing more detail on the impact of the changes on levies for schemes with varying funding levels and strength of sponsor in more detail.

The consultation is open until 20 December 2010.


October 2010 – draft determination for 2011/12/levy

The Pension Protection Fund (PPF) has published a consultation and draft determination in relation to the 2011/12 PPF Levy.

The PPF is proposing to set its levy bill at £600m for 2011/12 (a reduction of £120m on 2010/11). The move is the PPF’s “first response” to Government plans to increase PPF compensation in the future in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). It warns, however, that this “is a reduction that could be reversed in a single year should circumstances require”.

The PPF has also said that it:

  • will increase the cap on the risk-based levy from 0.5% of section 179 liabilities to 0.75%
  • will amend the “taper” so that schemes above 155% funded (2010/11: 140%) pay no risk-based levy and schemes over 135% (2010/11: 120%) will pay a reduced levy
  • estimates that the levy scaling factor will be 2.07 for 2011/12 (1.64 in 2010/11)
  • estimates that the scheme based multiplier will be 0.000135 for 2011/12 (0.000145 in 2010/11)
  • would like to remind schemes that there is still time to submit information in relation to contingent assets and deficit reduction contributions to affect the 2011/12 levy
  • will, as planned, use 31 March 2010 as the measurement date for insolvency and underfunding risks for the 2011/12 levy

The Board of PPF has said that the changes to the cap and taper were necessary to “maintain a fair distribution of the levy” and to continue to cap the risk-based levy of 10% of schemes. It also confirmed that changes consulted on in November 2009 are to be incorporated as planned. In particular, a new UK probability of insolvency table will be adopted for 2011/12 levies.

Alongside the consultation, the PPF has published updated guidance on how it will use its discretionary powers in relation to levy calculations. It has also updated its contingent assets guidance , although it confirms that (despite changes to the taper, described above) there are no changes to the rules for contingent assets.

Comments on the 2011/12 proposals should reach the PPF by 4 November 2010. The PPF will shortly publish its proposals on changes to the formula for the 2012/13 levy.


August 2010 - PPF: Long-term Funding Strategy

The Pension Protection Fund (PPF) has published details of its long-term funding strategy in which it sets out its aim to be “fully-funded” by 2030.The PPF also aims to have eliminated its exposure to interest rate, inflation and other market risks by this time.

In addition, the PPF intends to build up a reserve – or acquire hedging instruments – to protect itself against future claims on the PPF and against the risk of its members living longer than expected. It estimates that a reserve of 10% of liabilities will be sufficient in 2030 (with 90% confidence).

The funding target will be met by a combination of investment returns, proceeds from the assets of schemes brought into the PPF and by continuing to collect an annual pension protection levy from eligible pension schemes. The PPF will measure progress to achieving the funding target on an annual basis and, if things are not going according to plan, it may review the objective or other areas such as its own investment strategy.

The PPF has also published a 4-page factsheet summarising its approach.


March 2010 - PPF Levy Steering Group: Long Term Proposals

In 2009, the PPF set up an independent steering group to consider how the PPF levy should be calculated in the future. The steering group has published its recommended principles which are summarised here .

January 2010 – 2011/12 Levy: Insolvency Risk – UPDATE

Following its earlier consultation (click here for more details), the PPF has published its policy statement on how the risk of sponsoring employer insolvency is to be reflected in levy calculations from 2011/12. The final policy is as set out in the PPF’s November 2009 consultation.

January 2010 - Revised PPF Contingent Asset Guidance

The PPF has issued revised guidance for Schemes with PPF compliant contingent assets. For more details click here .

December 2009 – 2010/11 Levy Determination

The PPF has published its final levy determination, confirming how levies for 2010/11 will be calculated. For more details click here .

November 2009 – 2011/12 Levy: Insolvency Risk

The PPF has published a consultation document on the way in which the risk of sponsoring employer insolvency is reflected in levy calculations from 2011/12. If adopted, the proposals will affect failure scores from 31 March 2010. For more details click here .

November 2009 – Crown Guarantees

The Department for Work and Pensions (DWP) has issued draft regulations which could remove the partial exemption from PPF levies currently afforded to British Telecom (BT) and other commercial companies with a defined benefits (DB) pension scheme and a Crown guarantee. The draft regulations are under consultation until 4 December 2009.

In February 2009, the European Commission decided that BT’s partial exemption amounted to “incompatible State aid” and gave the company an unfair competitive advantage.