On 29 May 2014 the Pension Protection Fund (PPF), published a consultation setting out the plans they have in store for the next three levy years. As the pension protection levy is a compulsory cost imposed on all eligible pension schemes, the PPF recognises that it is important for it to be designed appropriately. A framework for the levy was introduced in 2011 which, after three years’ experience, has now been reviewed by the PPF.
The PPF proposes to use the revised framework for the pension protection levy from 1 April 2015 and in large, the framework is broadly unchanged. The most notable changes are as a result of the appointment of credit reference agency Experian to provide insolvency risk information to the PPF, replacing Dun & Bradstreet (D&B) which has been used since the PPF was established.
A bespoke model has been created by Experian for the PPF which focuses on the risk characteristics of employers who have defined benefit (DB) pension schemes. This is the first model that uses a PPF-specific method of calculating the risk of employer insolvency, presumably recognising that firms that are still operating DB schemes tend to be larger and older than employers without DB schemes and therefore have a different risk profile. According to the PPF, the new framework is not designed to change the total amount of the levy raised but ensure that the burden is distributed more fairly, with an estimated £130 million of the annual levy reallocated.
Trustees of DB schemes should seek to understand employers’ insolvency risk scores under the new model because the changes could be significant. The consultation paper estimates that 24% of employers would face, on average, a 150% rise in their share of the annual levy, whilst 34% of employers would be paying less. However, transitional protection is proposed for the 1,200 worst affected employers, paid for by higher levies from the others.
Martin Clarke, the PPF’s Director of Financial Risk, has stated that “the PPF looks forward to engaging with levy payers and other stakeholders over the coming months to ensure the new model is fully integrated and delivering greater accuracy and transparency in assessing insolvency risks“.
In particular, for those employers facing an increase in their levy, there is likely to be an increased need to take advice on what steps can be taken to control their risk score and therefore reduce the amount of their levy. Options such as attempting to de-risk scheme assets or offering the trustee of the scheme a contingent asset could potentially be explored.
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