Articles - New PPF levy rules – play your cards right

Just before Christmas the Pension Protection Fund (PPF) finalised a new set of levy rules which will apply for the next three years. The rules are largely in line with the PPF’s Autumn proposals, which means that schemes face a number of changes in the levy calculation. The PPF is aiming to reduce levies on average by 10%. However, with major changes to the Experian rating model used to place sponsoring companies in insolvency risk bands, there are going to be winners and losers.

 By Sankar Mahalingham, Head of DB Growth, Xafinity Punter Southall
 Schemes that face large levies or have seen a deterioration in their sponsoring company’s Experian rating may wish to flick through the deck and check whether there are any cards they can play to reduce their levy.
 Many schemes will have investigated the various levy reduction tools over the years and with a new set of levy rules in place with some developments and notable features, it may be beneficial to reconsider some of those options.
 What to look out for
 • The PPF has introduced a number of concessions to make the certification of deficit reduction contributions and some contingent assets more straightforward.
 • Schemes with Liability Driven Investment (LDI) strategies should check whether they would benefit from submitting a voluntary bespoke calculation of investment risk.
 • Schemes that have experienced a significant number of transfers out would be expected to see a more favourable PPF levy if they submit a new PPF-specific actuarial valuation.
 • The PPF has provided clarity on which entities can be categorised as a ‘Special Category Employer’ and subject to the relevant certificates being provided, be allocated to levy band 1.
 Look out for the joker in the pack!
 What about the insolvency ratings themselves? Indeed, over the years lots of companies have taken what are often straightforward actions to improve their rating. With a new Experian rating model in place, now is a good time to investigate whether there are opportunities to improve the sponsoring company’s Experian rating.
 Managing and improving your Experian rating
 • Check that the data held by Experian is correct, the small details can be really important.
 • Understand which numbers in the accounts are used to calculate the rating – in some cases companies have options around how or what they report.
 • Check that the company is being allocated to the correct scorecard. Experian apply different scorecards based on the size and structure of the company.
 • Where the company is being rated as a UK subsidiary of an overseas group, it is important to check that Experian are reflecting the correct parent entity.
 • Model the next set of financial statements to get a heads-up on the impact on the levy and what actions may be available.
 Highlights – new levy rules
 • Total Levy – the PPF aims to collect total levies of £550m. This is 10% less than the £615m it targeted for 2017/18.
 • Experian scores and public credit ratings – the trialled changes to the employer scoring system are going ahead as planned.
 Employers with formal credit ratings will be placed in a levy band using their credit rating, rather than the Experian model and a large proportion of other employers will see their rating calculated using different financial metrics.
 • Score averaging – for the 2018/19 levy Experian scores will be averaged over the 6 month ends from 31 October 2017 to 31 March 2018.
 • Levy rates for Bands 1 to 4 – the levy rates for Bands 1, 2, 3 and 4 are being brought closer together. Levy rates will now start at 0.28 for band 1 (currently 0.17) and rise to 0.40 for band 4. The idea behind this is to reduce the size of the steps up between those bands.
 • Reduced levy cap – the Risk-Based Levy cap is being reduced to 0.5% of smoothed liabilities (from 0.75% for the 2017/18 levy).
 • Contingent assets – the proposal to re-execute existing contingent assets has been postponed. Some re-certifications of the value of Type A contingent assets will now require reports to be prepared and submitted by a covenant specialist.
 • DRCs – the certification of deficit reduction contributions is being simplified.
 • S179 transformation – a revision to the way that assets and liabilities are risk adjusted, which the PPF expects to reduce levies on, but we have not yet been able to estimate by how much.
 • Revised accounts – if picked up by Experian by 28 February 2018, revised financial statements will be reflected retrospectively from the point the initial accounts were first captured in the Experian rating.

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