The Pension Protection Fund (PPF) has published its annual consultation on the draft levy rules for the 2019/20 year.  The draft levy rules set out the proposed basis on which the PPF will charge the Pension Protection Levy (the Levy).

The PPF observes in the consultation that last year, it experienced the highest level of claims in its history – a number of those claims have arisen as a result of the struggles or failure of high profile businesses.  Notwithstanding this, the PPF’s expectation for 2019/20 is that it will collect nearly 10% less in Levy payments (expected to total just under £500 million) than the amount estimated for collection in 2018/19.

So what is new?

In terms of the methodology which the PPF will apply in calculating the Levy, there are no material changes from last year’s Levy rules.  The main points to highlight concern contingent assets and scheme consolidation.

Contingent assets – re-execution of agreements

Type A or B contingent assets which have a fixed cap (which includes a floating cap where the fixed sum element is within a “lower of” formula) must be re-executed using the PPF’s new standard form agreements.  This was notified to the industry earlier this year.  The change arises from the PPF’s concern that a consequence of the current standard form wording can be that the amount available to a scheme under the cap can be eroded pre-insolvency.  If a sponsoring employer does not pay ongoing contributions, for example, and the trustees have to enforce the agreement to ensure the contributions are paid, there is less headroom up to the cap, should the employer become insolvent.  The new standard form agreements contain provision for a pre-insolvency cap and a post-insolvency cap.  The re-executed agreements should be submitted to the PPF in accordance with its contingent asset rules.

Scheme consolidation

The White Paper (Protecting defined benefit pension schemes) published by the Government in March this year included a proposal to enable the establishment of consolidators, where vehicles are set up by commercial entities to receive the assets and liabilities of previously unassociated schemes, with additional funding being provided by third party investors.

The PPF is pre-empting the introduction of legislation and/or regulation on commercial consolidators by introducing Levy rules to deal with such vehicles.  It feels that such schemes could be set up in the current environment, prior to legislation or regulation being introduced, as occupational schemes, with a company being established which would be the scheme’s “employer”.  Such schemes would be eligible for PPF protection, but they present different risks to more conventional schemes, and so the PPF wants to ensure that those specific risks are reflected in the Levy rules which will apply to consolidators.  Consolidators could grow significantly in size during a Levy year and profits could be withdrawn by investors, but on the upside, in the absence of a contributing employer, the consolidator is likely to have a buffer fund, which could provide greater security than members enjoy in conventional defined benefit schemes.

The rules proposed are designed to limit the impact of consolidator failure, to require consolidators to prove they are financially robust and to ensure that members enjoy greater security in a consolidator than they would have had in their employer’s scheme.

One to watch – 50% – the impact of the European Court ruling

In a recent case[1], the Court of Justice of the European Union held that each PPF member should receive at least 50% of the value of their accrued old age pension in the event of their employer’s insolvency.  The PPF had argued that the 50% minimum should be applied when looking at members’ benefits in aggregate, rather than being applied to an individual member’s benefits.

As a result of this ruling, the PPF is considering the impact of the decision (although it expects the number of individuals it affects to be small), and will make any necessary changes.

Consultation questions

The PPF asks a number of questions in its consultation, primarily around consolidators and the re-execution of contingent assets, along with questions on the communication and support which the PPF provides to schemes.

Responses to the consultation are invited before 5pm on 25 October 2018.

This blog post was written by Jill Walters. For further information, please contact:

Michael Collins, partner, Pensions

T: 0121 234 0236 

E: Michael.Collins@gateleyplc.com

[1] Hampshire v Board of the Pension Protection Fund (6 September 2018)

 


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.