There are a number of actions that companies and trustees can take to reduce the size of their PPF levy. We have significant experience in this area, and have helped a large number of companies and trustees in managing the size of their PPF levy. Some of the actions that can be taken to reduce the PPF are set out below.

If you are concerned about the size of your PPF levy, or would like to discuss the options below in further detail, please contact your local Barnett Waddingham contact, or email Nick Griggs.

Contingent assets

One way to reduce the PPF levy is to put in place a contingent asset.

Contingent assets include:

  • guarantees given by other companies in the group (Type A)
  • security over cash, UK real estate and securities (Type B)
  • letters of credit and bank guarantees (Type C)

A Type A contingent asset can be used to substitute the insolvency risk of a scheme’s sponsoring employer with that of another group company. This can be particularly useful in a case where, for example, the sponsoring employer is relatively weak, but the parent company is very strong.

Type B and C contingent assets are added to the scheme assets in the levy calculation, thereby reducing the scheme’s perceived underfunding risk.

Any certifications of contingent assets from the previous levy year need to be recertified on an annual basis.

The PPF provides standard documentation which must be used if the contingent asset is to be taken into account in the levy calculation. You should be aware that any new non PPF-compliant charges over assets can have a negative impact on an employer’s insolvency risk rating, so care should be taken when putting these in place.

Deficit reduction contributions

A deficit reduction contribution is a payment made to reduce the scheme’s deficit.  As this reduces the perceived underfunding risk of the scheme, the PPF allows these contributions to be taken into account in the levy calculation.

To do this, contributions need to be certified via the Pensions Regulator’s online exchange system by the required deadline, in order for them to affect the levy calculation.

Submission of Section 179 valuations

Section 179 (“s179”) valuations must be provided to the PPF through the Pension Regulator’s system, Exchange, within 15 months of the effective date of the formal actuarial valuation.

S179 results can be submitted at any time before this 15 month statutory deadline, and so if a scheme’s funding position has improved compared to the previous valuation, it may be worth submitting the results in advance of the statutory deadline to reduce the PPF levy payable.

Schemes may also consider commissioning an out-of-cycle s179 valuation if their circumstances have changed significantly since the last s179 valuation was submitted (for example, if a number of members have transferred out of the scheme).

Improving Experian scores

While the Experian model has been developed specifically to reduce the possibility of manipulating scores, there may be certain actions that can be taken to improve a company's Experian score.  We have particular expertise in this area, having worked with the PPF when the Experian model was introduced in 2015.

One of the main actions that schemes should take is to ensure that Experian are using the correct financial data and the correct scorecard in determining the employer's risk of insolvency, particularly in relation to overseas companies.

Reducing investment risk

As part of determining a scheme’s PPF levy, the PPF looks at the impact of extreme market conditions on a scheme’s funding position.

Low holdings of matching assets or high equity holdings can therefore lead to a substantial deficit under the stress test scenario (as the asset values are reduced to reflect the perceived risk of the underlying investments).

Stressed asset positions can be improved by reducing a scheme’s exposure to market movements in interest rates and inflation, amongst other factors. If the scheme’s investment strategy is consistent with such de-risking measures, taking steps to remove exposure to these factors may result in an improvement in the scheme’s stressed asset position and, as a result, a reduction in the scheme’s PPF levy.

Schemes can also consider submitting a bespoke asset stress as part of the annual scheme return to better reflect the characteristics of the scheme’s investments.  This can be particularly useful (in terms of levy saving) for a scheme with a risk-reducing investment strategy in place, e.g. liability-driven investments.