The Pension Protection Fund (PPF) has given an early indication of the changes that it intends to make as part of its three-yearly review of the PPF levy rules, with a particular focus on the Experian model used to calculate insolvency risk.
The 2017/18 PPF levy will bring to a close the second levy triennium – a period that will mostly be remembered for the change in insolvency risk provider from Dun & Bradstreet to Experian.
The PPF has noted that the Experian model has been broadly popular, and that there has been a significant reduction in the number of PPF levy appeals since the introduction of the new model.
However, with a new levy triennium starting in 2018/19, the PPF is intending to update certain aspects of the model to help improve accuracy and, ultimately, to better reflect the risks that the PPF is facing.
The main areas that the PPF is intending to consider in relation to the Experian model are as follows:
- The PPF is once again considering the use of credit ratings to determine the insolvency risk for larger employers, as well as the possibility of using an industry-specific scorecard for regulated financial entities. This will only affect a small proportion of pension scheme sponsors, but the PPF hopes that this will lead to better insolvency modelling for the larger employers (many of whom will pose a large risk to the PPF).
- To reduce the scope for score manipulation, the PPF is considering combining the 'Large and Complex' and 'Independent Full' scorecards. The PPF is also considering dividing this combined scorecard based on turnover, reflecting comments that the disparity in size of the employers on this scorecard makes it difficult to accurately model insolvency events.
- It is now three years since the Experian model was developed, so the PPF is considering recalibrating the scorecards to take into account recent insolvency experience. The PPF now has access to data from the Charity Commission, which it intends to use to recalibrate the Not for Profit scorecard.
As well as these proposed amendments to the calculation of insolvency risk, the PPF is anticipating that some work may be undertaken in other areas relating to the PPF levy calculation.
"It will be important for employers and pension schemes potentially affected by the changes to take the opportunity to engage with the PPF when they issue their consultation to ensure their views are considered."
- the treatment of investment risk
- requirements in relation to Deficit Reduction Contribution (DRC) certificates
- certifications of contingent assets and asset-backed funding arrangements
- potentially simplifying requirements in relation to smaller schemes
The PPF is expecting to publish an initial consultation later this year or in early 2017, with a consultation on the final levy rules for the third triennium being published in autumn 2017.
Meanwhile, a consultation for the calculation of the 2017/18 PPF levy (i.e. the levy expected to be invoiced in autumn 2017) is expected this autumn, with the final rules published before Christmas 2016.
It will be important for employers and pension schemes potentially affected by the changes to take the opportunity to engage with the PPF when they issue their consultation to ensure their views are considered.
In particular large employers, regulated financial services entities and not-for-profit organisations should monitor any proposals carefully as they could see material changes to their PPF levies.
Lewys Curteis contributed to the writing of this blog post.