The PPF levy invoice will be one of the most significant bills landing on a pension scheme's doorstep each year. Given the current economic climate and the increase in the levy this year, it is likely that achieving reductions is particularly high on trustees' and employers' agendas.
In this Alert:
How can schemes reduce their PPF levy?
1. Check the scheme data
The levy is determined using data from the scheme's Annual Return. Schemes should therefore ensure the data they have submitted to TPR on Exchange is accurate and up-to-date.
2. Inform the PPF of investment changes
The PPF takes into account the scheme's investment risk using the asset allocation split on Exchange. If a scheme has taken steps to de-risk its investment strategy, Exchange should be updated accordingly.
3. Improve D&B ratings
The PPF relies on D&B failure scores to assess the risk of a scheme's sponsoring employer going bust. The failure score used is an average of the employer's monthly scores over the previous year. In addition, operational issues such as late payment of invoices and the composition of the board can have an impact on an employer's score and may be easy to address.
- check the information D&B holds on all of the scheme's participating employers is correct and up-to-date; and
- look at the methodology D&B use in setting the failure score.
A score can be appealed if the employer thinks it has been wrongly assessed.
4. Make deficit reduction contributions
The PPF defines DRCs as "an employer's total contributions to the scheme (with no adjustment being made for investment returns) less:
- the cost of accrual of scheme benefits, subject to certain adjustments;
- scheme expenses incurred between valuations;
- the cost of augmentations granted since the previous valuation; and
- benefits paid out of the scheme."
Improving the funding position of the scheme can reduce the levy, provided the DRCs are certified within the required time frame. If employers have agreed to make additional or accelerated contributions (for example, as part of scheme funding arrangements or in connection with a transaction or re-organisation) they should consider the timing of those payments to ensure that, if possible, they are taken into account in the levy calculation.
5. Use contingent assets
The PPF recognises that a scheme's security can be improved by using contingent assets, such as a guarantee from a stronger company within the sponsoring employer's group or security over assets (for example, property or securities).
Contingent assets will only be recognised if they meet certain requirements, including being in the PPF's standard form, and they are submitted by the PPF's deadline. If employers are considering providing additional security to their scheme they should consider whether they could use an arrangement which meets the PPF's requirements and would therefore also reduce the scheme's levy.
6. Update the section 179 valuation
The PPF assesses a scheme's funding level using its section 179 valuation. These valuations are normally completed every three years, as part of the scheme's triennial valuation. There is significant scope for the funding position to alter in that time. If there have been significant changes since the last section 179 valuation was completed, schemes should consider updating the valuation and re-submitting this to the PPF.
PPF and CBI guidance
The PPF recognises that these are testing times for businesses and that many employers will want to look at ways of reducing their levy. With this in mind, the PPF and the CBI have published joint guidance
for employers to help them understand how the levy works and to explain some of the key ways schemes can reduce their levy.
As the levy is calculated on an annual basis, any changes made now would apply to the levy year 2013/14.
The PPF imposes tight deadlines and provisional dates for the 2013/14 levy have now been set. Please see our Alert: "2013/14 PPF Levy Consultation"
It can take time to implement some of these changes. Schemes should therefore think about their options sooner rather than later to avoid the risk of running out of time. Please speak to your usual contact at Sackers to discuss any steps that could be relevant to your scheme.