Lewys Curteis contributed to the writing of this blog post
The Pension Protection Fund (PPF) has released its consultation in relation to the determination of the 2016/17 PPF levy.
In line with the PPF’s objective to maintain stability over a three-year period, few changes have been proposed compared to the current calculation method, with the levy parameters remaining unchanged. After the significant changes brought in last year, this will come as a relief to employers and trustees alike.
The PPF has estimated that it will collect £615 million from the 2016/17 PPF levy, compared to an estimated £635 million from the 2015/16 PPF levy. Although the PPF expects funding levels to have worsened due to recent market condition changes, the PPF anticipates that it will collect a reduced risk-based levy due to improvements in insolvency risk scores over the period.
Although the PPF’s approach is largely the same as last year, schemes will need to be aware of some of the changes that the PPF has proposed.
Last Man Standing schemes – incorrect identification
Of greatest concern to a number of schemes will be the PPF’s proposal to re-invoice schemes that have in previous years been incorrectly identified as 'Last Man Standing' (LMS). LMS schemes benefit from a reduction in PPF levy due to the lower risk that these schemes pose to the PPF. Therefore, schemes incorrectly identified as LMS in the past have essentially been underpaying their PPF levy by around 10%.
The PPF believes that the correct approach is to re-invoice these schemes for previous years’ PPF levies and will be contacting the schemes concerned later this year. This decision is perhaps surprising, although obviously justifiable provided it is done reflecting the circumstances that applied each time the certification was made by the trustees. For schemes paying large PPF levies, the cost of this could be significant, and we would recommend investigating this as soon as possible.
"The PPF has noted that around 29% of the universe of sponsoring employers is now in the top band, compared to the 20% it had planned. Consequently, there are fewer employers than intended in some lower bands"
In relation to the insolvency risk calculation, the PPF is proposing that, with the exception of immaterial mortgages, mortgage exclusion certificates will not need to be re-submitted to be taken into account in the 2016/17 PPF levy. This is a welcome development, and will reduce the workload for a large number of employers. The PPF is also seeking views on the possible use of private credit ratings in the mortgage exclusion process.
Where a company files non-sterling accounts, the PPF has decided to convert the accounts into sterling based on a conversion rate applicable at the accounting date, rather than the current method of using a single exchange rate at 1 April. While this will provide a measure of insolvency risk that is more consistent with those filing sterling accounts, schemes should be aware that this may cause unanticipated changes to insolvency scores, particularly those with foreign parent companies.
The PPF has also commented on the impact of the new accounting standard, FRS102, on the insolvency scores of sponsoring employers, and is seeking feedback from schemes and advisors in relation to this in advance of a more detailed review of the levy next year. Click on the link below for further details on this.
Another item for review next year will be the levy band boundaries. The PPF has noted that around 29% of the universe of sponsoring employers is now in the top band, compared to the 20% it had planned. Consequently, there are fewer employers than intended in some lower bands. The PPF will be monitoring the movement of scores and would expect to implement changes from the 2018/19 levy – although it is keeping options open for earlier change if necessary.
Asset Backed Contributions
In relation to Asset Backed Contribution (ABC) arrangements, the PPF has set out some guidance in relation to recertification, with the intention of reducing the burden on schemes. The PPF is seeking views on the practicality of the suggested approach.
While the levy amount to be collected is decreasing slightly, some employers may still see an increase in their own individual levy – most obviously where there is an actual or perceived deterioration in the finances disclosed in a company’s accounts. It is important that employers check the information held by Experian and on the annual scheme return to ensure they are not paying more than their fair share.
The PPF’s consultation closes on 22 October 2015. Please contact us if you have any comments you would like included in our response to the consultation.
"Of greatest concern to a number of schemes will be the PPF’s proposal to re-invoice schemes that have in previous years been incorrectly identified as 'Last Man Standing' (LMS)"