By Alistair Russell-Smith, Partner & Head of Corporate DB, Samer Hafiz, Senior Actuarial Consultant, Stuart Gray, Senior Actuarial Consultant at Hymans Robertson
1. Budget – how much is the expected levy? At this stage, a reasonably accurate estimate can be made to establish whether this is in line with expectations and whether any mitigating action might be needed. This is particularly the case for companies whose trading has been adversely affected by Covid-19 and are now starting to file accounts that cover pandemic periods. Does the data underlying the insolvency assessment look correct?
2. Consider mitigative action – as a rule of thumb we’d say if the levy is over £100k, companies should annually consider whether they’re doing enough to manage the expense.
3. Out of cycle s179 valuations – generally submitted every three years but submitting more frequently can allow you to “bank” favourable asset returns in the levy calculation. In particular:
Schemes with current s179 valuations at 31 March 2020 – around this time the realisation that Covid-19 was a global pandemic was expressed in financial markets leading to depressed asset values. The issue is exacerbated by the PPF’s methodology which doesn’t, for example, allow for credit spreads so any subsequent recovery of corporate bond holdings won’t be captured.
Schemes with significant holdings of equities or corporate bonds. Both of these could have seen significantly stronger returns than the PPF would assume in their calculations.
A common misconception is that you need to do a full actuarial valuation. You don’t; approximate methods can be used so long as the scheme actuary can certify that, in their view, the liabilities have not been understated. It needn’t therefore be a time consuming and costly exercise. You will need audited scheme accounts though which tends to limit the number of potential valuation dates.
4. Bespoke stress tests – for schemes with liabilities under £1.5bn this is optional but well worth considering where there are large holdings of LDI (particularly longer dated index-linked gilts). Additionally, it’s worth considering where steps to manage equity risk (e.g. through use of equity collars) have been taken. Again, you’ll need audited scheme accounts for this. And, given the interplay, it’s worth considering valuation and stress submission together rather than in isolation (in case action is inadvertently taken that increases the levy).
5. Remember the usual mitigations – e.g. if paying significant recovery plan contributions then make sure they’re certified, if guarantees are in place could they be made PPF compliant? Often, these aspects can be explored with minimal time and effort compared to the potential savings so it’s worth corporates considering comfortably in advance of the 31 March 2022 deadline. Our analysis has found that one £1bn scheme that is in PPF levy band 4 and 90% funded on the PPF basis could save £150,000, halving its £300,000 PPF levy, by completing an out-of-cycle PPF valuation
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