PPF Levy forum
How to reduce your PPF levy
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 Lewys Curteis.
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.
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.
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).
Although the PPF’s model has been developed to reduce the possibility of manipulating scores, there may be certain actions that can be taken to improve a company's insolvency risk score.
One of the main actions that should be taken is to ensure that the correct financial data and the correct scorecard is being used to determine the employer's risk of insolvency.
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.
Stressed asset positions will be better for those schemes that have lower risk investment strategies and/or hedging strategies in place to reduce interest rate and inflation risk. To gain full credit for any risk-reducing strategies, schemes should consider submitting a bespoke asset stress as part of the annual scheme return.