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PPF levy policy 2012/13 onwards
Recently the Pension Protection Fund (PPF) 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 The statement follows proposals originally made by a “Steering Group” of pensions experts in March 2010, and a consultation that began in October 2010. One of the PPF’s main objectives in making these changes is to bring some stability to schemes’ levies from year to year.
PPF levies are currently calculated as follows:
Under the new structure:
- Underfunding Risk (U) will continue to be calculated using data submitted on schemes’ annual returns to the Pensions Regulator (tPR), but the market indices used to bring the funding level calculations up to date will be smoothed over the preceding five years.
- U will incorporate an assessment of the scheme’s investment risk. For most schemes the PPF will calculate a “funding stress” factor based on investment strategy data captured by tPR via the Scheme Return. Schemes may carry out their own stress testing on their assets and submit the results to the PPF, although the PPF suggests this approach may only be appropriate for schemes with a risk-reducing derivatives strategy in place. For the largest schemes (assets over £1.5bn), self-testing will be compulsory.
Schemes that invest a greater proportion of their assets in equities for example should expect, all else being equal, to pay higher levies. For example, typical adjustments (“stresses”) applied to asset values are expected to be:
| Corporate Bonds |
+1% |
| UK Equities |
- 22% |
| Overseas Equities |
- 19% |
| Index-linked Gilts |
+16% |
| Nominal Gilts |
- 9% |
- Insolvency Risk (I) will continue to be based on Dun & Bradstreet (D&B) “failure scores”. From 2012/13 the current 1-100 scoring system will be replaced by ten bands (see table below) so that levies will no longer be as sensitive to small changes in failure scores. The PPF had originally proposed that six bands be used. The danger remains, however, that there will be significant changes to PPF levies when an employer moves between bands.
| Levy Band |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
| D&B Failure Score |
100-99 |
98-96 |
95-92 |
91-87 |
86-73 |
72-66 |
65-46 |
45-38 |
37-30 |
29-1 |
| Levy Rate (Insolvency Probability) |
0.18% |
0.28% |
0.44% |
0.69% |
1.10% |
1.60% |
2.01% |
2.60% |
3.06% |
4.00% |
The PPF had been considering adopting a transitional relief approach to help smooth levies for schemes whose employer moves down a band during the year, but has now dropped this proposal.
Final failure scores each year will now also be based on the average of month-end failure scores over the year to 30 March, rather than simply taking a snapshot at each 30 March. For the 2012/13 levy, the first measurement date of 28 April has already passed.
- The PPF scaling factor (the “fudge” factor the PPF uses to ensure the total levy collection was correct – i.e. Factor 1 above) will be fixed subject to legislative limits. Between 2012/13 and 2014/15 you should therefore only see a change in your levy if your risk to the PPF changes.
- The PPF will make other changes to the 2012/13 levy that it estimates will reduce the proportion of total levies made up of the scheme-based levy to approximately 10% (currently 20%).
There will inevitably be winners and losers under the new arrangements. The PPF expects poorly funded schemes with strong employers to shoulder the biggest increase.
Please contact your usual Barnett Waddingham consultant or email corporateconsulting@barnett-waddingham.co.uk if you would like further information on this.