P(l)aying by the rules - the top 6 changes to the PPF Levy that you need to know
November 20, 2017
The Pension Protection Fund (“PPF”) has recently released its new levy rules for the next three years. There will be some significant winners and losers - Although the aggregate PPF collection target for the upcoming year is due to fall by 10% from £615m to £550m, 1 in 5 schemes supported by large employers will see a higher levy and 2 in 3 schemes, mostly supported by SMEs will see a lower levy. Which category are you in?
Key points for you to consider
- Credit rated entities are now on a new scorecard which could see investment grade employers fall as low as a levy band 4 (for BBB- rated entities). Credit ratings have been proven to more accurately reflect insolvency risk and should result in more appropriate levy charges, but could see some significant movements in levy band for those affected.
- As a rule of thumb, if you or your employer don’t have a credit rating but are a large company (whether subsidiary of a group or independent), likelihood is your levy will increase. I’ve seen first hand that many employers in this category have seen a significant worsening in levy band which could see an expected increase in levy of up to 45%.
- PPF guarantees that are saving or expected to save £100k or more on levies will now need a report from an independent advisor who also provides a duty of care to the PPF. This is expected to cover 20% of all certified guarantees. The PPF has not specified whether this report needs to be commissioned by the Trustee’s or sponsor’s employer, so sponsors can take action here (given many sponsors directly or indirectly fund the levy).
- The step change between levy rates of levy bands 1 to 4 has been reduced. This means a move from levy band 1 to 4 will now only result in a c.50% increase in levy compared to a c.135% increase under old levy rates.
- The levy scaling factor is expected to fall from 0.65 to 0.48. This change will have a positive impact, which may help to offset the negative impact if there is a worsening in levy band under the new rules.
- Certifying deficit repair contributions for PPF levy purposes has just got simpler - schemes will no longer need to account for investment management expenses. Small schemes where liabilities are below £10m, will have the option to use recovery plan payments where circumstances are straightforward. This should ease the process which should see an increase in the level of certifications.
The PPF has continued to build on previous methodology, by calibrating the scorecards to better reflect insolvency experience and address specific risk areas in the overall approach.
The period from which the PPF will calculate the levy for a scheme started on 31 October 2017 so can you afford to wait to see what the impact of this is? We would recommend to all schemes and their employers to take a proactive approach to understanding and managing their PPF levy.