PPF levy to be cut – will your scheme benefit?

Chris Ramsey contributed to the writing of this blog post

The Pension Protection Fund (PPF) yesterday published its response to its May 2014 consultation on the structure of the next 3 years’ PPF levies and draft rules for the 2015/16 PPF levy.

Overall the levy is down, but is yours?

The PPF is targeting collecting £635 million for the 2015/16 levy year, a 9% reduction compared with the 2014/15 year. The PPF has also said that it expects levies to fall further in the next two levy years.

This welcome piece of news hides the fact that many schemes will see a large change in their levy due to the rule changes the PPF is bringing in from 2015/16 (most notably the change in insolvency risk model from the D&B score to Experian’s bespoke model). Hundreds of schemes will see their levies more than double, whilst many others will see equally dramatic reductions.

The PPF argues that the new model gives a better reflection of risk and so these levy changes are a move to a fairer distribution of the levy. Whilst this is true in the majority of cases, it is not necessarily always true. There will be some schemes that will see higher levies not because their sponsor is more risky than the average company, but because the new model isn’t suitable for their type of business.

Unfortunately, the PPF’s understandable desire for a simple and statistically robust model will inevitably mean that there will be some schemes that pay higher levies than their true risk really justifies.

Changes to PPF levy rules

  • The PPF has made a number of welcome changes to the PPF levy rules it set out in the May 2014 consultation. The draft model penalised companies for having an unsatisfied secured charge (i.e. mortgage). The PPF has decided to ignore mortgages it believes don’t result in increased insolvency risk (for example, immaterial charges or those in favour of the pension scheme). Employers/trustees will need to provide evidence to Experian that the mortgage is eligible for removal from the model. The PPF is also consulting on what 'immaterial' means.
  • The PPF will now recognise any asset underlying an asset backed contribution vehicle (ABC), albeit subject to some fairly stringent valuation conditions. The PPF acknowledge that the fees involved in satisfying the PPF’s requirements will likely put a lot of schemes with ABCs off using this flexibility.
  • Group companies providing a guarantee will no longer have their insolvency score adjusted if they are the ultimate global parent in the group and file consolidated accounts. Whilst this makes a lot of sense, we still question whether it is necessary for other companies given that trustees need to certify the guarantor could meet its obligations.

Equally as interesting are some of things that the PPF chose not to implement, including an override to the Experian score if the company had a credit rating.

What should employers and trustees do now?

Behind some of the headline changes in the insolvency risk model there are a number of other important small changes that could result in a large shift in score from those made available after the May 2014 consultation.

For example, Experian will be making a number of changes to its procedures in situations where data is missing (in part relating to foreign parents) that could result in large score changes for certain companies. It is also going to start to use a wider source of data, including data from the Charities Commission.

Scores under this revised PPF model will be published from 7 October, and first start to count towards the PPF levy from 31 October. Employers/trustees should check the data Experian holds before 31 October to ensure it is calculating the scores correctly.