The Pension Protection Fund (PPF) levy determination for 2015/2016 will have a number of key differences from previous years. The new rules have been issued for consultation by the PPF with the final determination likely to be made in December. However, it is likely they will be made in substantially the same form and as most information has to be submitted by 31 March 2015, it is not too early for schemes to start preparing.
New method for assessing insolvency risk
The biggest change is the new method of insolvency scoring for employers, now undertaken by Experian. Each employer will be being given a "scorecard" predicting its risk of failure. This could result in schemes receiving substantially larger (or smaller) levy demands than in previous years. The PPF had considered putting in transitional relief for those with larger demands than previously but this has now been rejected on the basis that the new method should more accurately reflect the real risk to the PPF and those schemes that now have a higher levy may well have benefited in the past at the expense of lower risk schemes.
Treatment of asset-backed contributions
Schemes wishing to rely on the value of asset-backed contribution (ABC) arrangements to reduce their PPF levy next year will have to satisfy stringent new requirements. Although the final rules will not be in place until December, schemes with ABC arrangements should already be starting to think if, and how, they can satisfy the requirements.
In a preliminary consultation in May, the PPF suggested that it would recognise ABCs only if they were backed by real estate assets. The PPF has moved back from this position and has decided to accept ABCs with no restriction on the underlying assets but with strict guidelines for valuing them and an onerous certification requirement.
The key concern of the PPF is the effect the insolvency of the employer would have on the value of the underlying assets. Trustees will be required to submit an annual valuation of the amount they could expect to realise from the investment in an insolvency situation. This will be a combination of the value of the underlying asset itself and the effect of the legal documentation and structure of the ABC (such as step-in rights).
The PPF is insisting that it must be allowed to rely on the valuation. This would mean that in the event of an insolvency and the scheme entering an assessment period, the PPF would have direct rights to claim against the valuer in the event of a negligent valuation.
Trustees will also be required to certify, based on legal advice, that certain requirements are met. As with the valuation, the PPF will be able to rely directly on the legal advice. The matters which must be certified include confirmation of the validity and enforceability of the ABC.
Contingent assets
There are also some changes to the certification requirements for contingent assets, in particular group company guarantees. It is not too soon for trustees to start documenting this in preparation for submission to the PPF before the end of March.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
