The Pension Protection Fund (PPF) has issued feedback on its earlier consultation regarding the calculation of levies for the three years commencing with the 2018/19 year (see our earlier article at /news/pension-protection-fund-levy-consultation). The response comprises a further consultation on its final proposals, along with draft levy rules for 2018/19.
The headline announcement is that the PPF proposes a total levy for 2018/19 of £550 million, more than 10% less than the target for 2017/18 (£615 million).
The PPF intends to proceed with its earlier proposals relating to:
- insolvency risk,
- parental guarantees and
- deficit-reduction contributions,
with only limited changes.
If the PPF’s proposals had been in effect for the 2017/18 year, it estimates that:
- nearly two thirds of schemes would have seen a lower levy,
- about a fifth of schemes would have seen a higher levy and
- the aggregate levy paid by SMEs would have been about a third lower.
Draft Levy Rules
The Scheme-based Levy Multiple will remain at 0.000021. The Levy Scaling Factor, used in the calculation of the Risk-based Levy, will be reduced from 0.65 to 0.48 and the Risk-based Levy cap from 0.75% to 0.5% of a scheme’s smoothed liabilities.
Insolvency risk
The Experian model, which has been used for the last 3 years for measuring insolvency risk, includes a set of eight “scorecards” developed for different types of employer. Following consideration of the responses to its consultation the PPF proposes to rebuild five of those scorecards – as set out in its March consultation – and to recalibrate the other three to reflect better actual experience.
The PPF will also be using credit ratings, where available, in its scoring methodology and adopting a credit model to assess insolvency probabilities for regulated financial companies.
Insolvency scores will continue to be based on the average of 12 monthly Experian scores, apart from the 2018/19 year when only six scores will be used. There will continue to be 10 levy bands but the levy rates for bands 1, 2 and 3 will be changed to 0.28, 0.31 and 0.35 respectively (currently 0.17, 0.23 and 0.30). The effect of the rise in these rates will be offset by the reduction in the Levy Scaling Factor.
Parental guarantees
In order for trustees to certify Type A contingent assets that would reduce the levy by more than £100,000, they will have to obtain a guarantor strength report in advance of certification. The report will have to demonstrate that the guarantor would be able to meet the terms of the guarantee in the event of the employer’s insolvency.
The PPF is now consulting on new wording for the standard type A and B contingent asset documents forms. New contingent assets will have to be based on the new wording for 2018/19 but existing contingent assets have an additional year to adopt the new wording.
Deficit-reduction contributions
There will be three ways of certifying Deficit-reduction Contributions.
If:
- the value of the scheme’s liabilities is less than £10 million,
- the scheme has been closed to accrual throughout the period since the last section 179 certificate and
- there has been a Recovery Plan in place for at least part of that period,
the actual contributions paid can be certified. This will be called Option Beta.
If the contributions to be certified are no greater than £1 million and comprise only contributions included in a Recovery Plan, a trustee or an employer representative may certify them. Otherwise the Scheme Actuary will have to provide the certification.
If Option Beta is not suitable, Option Alpha allows certification of the contributions by any qualified actuary with appropriate experience and does not require that investment management expense be deducted.
This is intended to avoid smaller schemes being deterred from obtaining the required certificate.