Actions for trustees and employers to take to reduce their schemes’ PPF levy

Written on 5 Feb 2015

Despite a reduction in the amount the PPF will collect during Levy Year 2015/16, many schemes will find that their PPF levy will have increased materially. This is due to the PPF measuring insolvency risk using Experian’s bespoke scorecards, since 30 October 2014. 

Under Experian’s model, employers are assigned to one of eight scorecards which take account of an employer’s turnover, position within a group of companies, the type of accounts it files and whether it is a not-for-profit entity. 

Once allocated to a scorecard, Experian uses a rating system to predict business credit risks and failures for each employer over the following 12 months. A monthly score is allocated to each employer. These scores are then averaged out over the course of a levy year (although for this levy year, it will be averaged out proportionately between 31 October 2014 and 31 March 2015). 

Experian is, therefore, reliant on being provided with financial and non-financial data. It sources data from registries such as Companies House, the Charity Commission, the Pensions Regulator (via Exchange) and similar International registries. Additionally, employers and trustees can provide data to the PPF, the Pensions Regulator or Experian voluntarily. 

In order to reduce the impact to your scheme’s levy as a result of the PPF’s change, trustees and employers can take the following actions:

Action Detail Deadline
Check date held by Experian

  • Check that your scheme’s participating employers’ and any guarantors have been allocated to the correct scorecard.
  • Check whether there are any gaps in the data held by Experian.
Employers and trustees can check out employer / guarantor scores via the link here.

If the entity has been allocated to the wrong scorecard or there is data missing you can contact Experian directly, or amend the underlying data by providing updated documents / information to the relevant registry (i.e. Companies House, the Pensions Regulator via Exchange or the PPF).

Provide data via Exchange

  • If not done so already, submit your scheme return to the Pensions Regulator.
The scheme return provides the PPF with the scheme’s section 179 valuation details which are crucial in its calculation of the PPF levy. 5pm on 31 March 2015
Certify / recertify PPF contingent assets (such as a company guarantee or a charge in favour of the trustees) Provided the contingent asset is in the PPF’s standard format and can be shown to actually reduce insolvency risk, the PPF will reduce your scheme’s PPF levy accordingly.

In order to certify / recertify a PPF contingent asset, certain documents are required to be sent to the PPF by post and via Exchange.

We will provide more details on the process for certifying and recertifying contingent assets for Levy Year 2015/16 in a separate update to follow next week.

5pm on 31 March 2015
Certifying asset backed contribution (ABC) structures

  • Trustees can voluntarily certify the value of their ABC structures by completing a form
The PPF is recognising ABC structures in its calculation of the PPF levy for the first time. There is no restriction on the type of underlying asset in such structures.

If trustees certify the value of the ABC structure, the PPF will recognise the lower of:
(i) the value of the ABC structure on an insolvency basis (using the stressed asset value); and
(ii) the fair value of the interest as reported in the scheme’s annual return and accounts.

Valuing the ABC structure for levy reduction purposes is complicated and the trustees will need to take professional advice from a number of different advisers. This will include legal advice broadly on the ABC structure itself and the trustees’ legal rights under it.

The ABC certificate can be accessed here. The ABC certificate should be downloaded and completed onscreen. Once completed you can click the ‘Submit’ button. This will generate an email to send the data back to the PPF.

Guidance on certifying ABC structures can be found here.

5pm on 31 March 2015
Certifying mortgages with Experian

  • Check what mortgages Experian are taking into account in calculating the scheme’s participating employers / guarantors monthly scores.
  • If you wish to exclude a mortgage, you must certify it by completing the relevant officer’s certificate at the back of the guidance click here
Most scorecards count an employer’s most recent charges as a negative factor, and so increase its risk of insolvency. However, some charges (e.g. a Type B contingent asset) act to reduce the PPF levy and others may not necessarily be predictive of an employer’s insolvency risk.

In order to avoid the benefit of such charge being cancelled out, the PPF has provided that the following mortgages, if certified with Experian, can be excluded from the Experian scores:
(i) charges in favour of trustees;

(ii) charges given when refinancing is on equal or better terms;

(iii) rent deposit charges;

(iv) an immaterial charge (i.e. the amount of the charge is less than 0.5% of the chargor’s total assets set out in its latest accounts); or

(v) the employer or wider group has an investment grade rating with one or more of Standard & Poor, Fitches Rating or Moody’s Investor Services.

Guidance on certifying mortgages to be excluded can be found here.

5pm on 31 March 2015
Certifying deficit reduction contributions (DRC)

  • Ask your scheme actuary to confirm if there are any DRCs which should be certified with the PPF via Exchange
You can certify with the PPF any DRCs paid after the scheme’s section 179 valuation, but before the last day of the month immediately before the date you certify the DRCs.

Any certified DRCs which have the effect of reducing the scheme’s deficit or increasing its surplus (calculated on the section 179 basis), will be taken into account to reduce the PPF levy.

The scheme’s actuary will need to calculate the value of the DRCs to be certified, as the calculation involved is quite complex. Further details of the calculation can be found here.

5pm on 30 April 2015
Confirming status as a last man standing (LMS) scheme

  • If you believe your scheme is a LMS scheme, we can review the position and provide the required legal advice
  • Alternatively, wait for the Pensions Regulator’s e-mail and take advice once received
A LMS scheme is broadly a multi-employer occupational pension scheme which does not contain in its rules a requirement or discretion for its trustees to segregate assets when an employer ceases to participate in it.

In previous levy years, LMS schemes have received a 10% reduction to their PPF levy.

For this levy year, LMS schemes will receive up to a 10% reduction, depending on how dispersed the scheme’s membership is across its employers. The more dispersed the members, the higher the reduction.

In order to stop schemes which are not LMS schemes from benefiting from this reduction, the Pensions Regulator will send an e-mail to all schemes which have indicated that they are LMS schemes and ask them to certify whether they have obtained appropriate legal advice confirming that they are a valid LMS scheme.

The Pensions Regulator’s e-mail will be sent out after 31 March 2015.

Schemes will have until 29 May 2015 to reply

Certification of block transfers

  • Certify any DRCs with the PPF via Exchange
For PPF levy purposes, a block transfer relates to the transfer of all of a scheme’s members (or all but one member) to another PPF eligible scheme.

If your scheme was involved in such a transfer between 1 April 2014 and 31 March 2015, you will need to certify the estimated section 179 valuation positions of the schemes involved in the transfer.
This is to ensure that schemes that have transferred all their liabilities are not charged a levy, and that the liabilities are correctly recorded at the receiving scheme so that their levy takes account of them.
If you do not report such a transfer, the PPF will apply a less favourable calculation of your scheme’s liabilities, which will increase the scheme’s overall levy.

You can get more details on how to complete block transfer certificates here.

5pm on 30 June 2015