PPF announces levy estimate for 2015/16 and conclusions on the levy’s future

Introduction

On 6 October 2014, the PPF announced that the levy estimate for 2015/16 would be set at £635 million, nearly 10% lower than the estimate for 2014/15.  At the same time, the PPF published the conclusions of its consultation on the future of the levy, together with a further consultation on its draft levy rules and supporting documents. The further consultation runs to 13 November 2014.

In this Alert:

• Key points
• PPF specific model
• ABCs
• Contingent assets
• Last man standing schemes
• Next steps

Key points

• The PPF is moving to a new, PPF specific, model for measuring employer insolvency risk for the levy years 2015/16 onwards. Although generally well received, the model has been tweaked in response to comments made in consultation.
• There will be no transitional protection for those whose levy will be most affected by the move to the new model.
• The PPF has decided it will recognise ABCs in relation to all asset types (not just UK property as originally proposed), provided the ABC is valued and certified in accordance with its requirements.
• Following the changes to the model, the PPF/Experian web portal was relaunched on 7 October 2014. Even if they have done so before, trustees and scheme advisers should log on, before 31 October 2014, to check that their data is/remains accurate and up to date.
• Schemes identifying themselves as “last man standing schemes” (LMSs) on Exchange will be asked to confirm that they have taken legal advice which supports that conclusion by 31 May 2015.

PPF specific model

The new PPF specific model for measuring insolvency risk is based solely on information about sponsors of DB pension schemes and, as such, is focused on those variables that are most predictive for this particular group of entities.

The PPF has made some improvements to the model in response to comments received. For example, it now ensures that mortgages which are not relevant to insolvency risk are excluded.

Data hierarchy

Instead of prioritising sources such as Companies House over data supplied directly by the employers/guarantors, the PPF has decided to prefer more complete data. This will allow businesses filing abbreviated accounts at Companies House to share full accounts with Experian.  However, to prevent “gaming”, once employers/guarantors have opted to submit full accounts voluntarily, the PPF will effectively require them to continue to do so in subsequent years.

No credit ratings override or transitional protection

Although some employers will see a substantial change in their levy under the new model, the PPF has decided not to offer any transitional protection to reduce the scale of the changes to the levy for those most affected. In addition, the PPF will not use companies’ credit ratings to replace model generated scores.

ABCs

To date, ABCs have been taken into account in the levy calculation as they form part of the assets reported in the scheme’s section 179 valuation. In addition, payments made by the employer to the scheme to set up an ABC are often certified as deficit reduction contributions (DRCs).  To ensure appropriate credit is given for these structures, the PPF is changing the manner in which they are recognised.

The PPF proposed that, from the levy year 2015/16, it would only recognise UK property based ABCs. However, following consultation (for details please see our Alert), it has decided that contributions or cashflows relating to any ABC may be recognised, provided the ABC is certified.  Key aspects of the certification procedure will include:

• trustees will be expected to certify the lower of the insolvency value of the interest in the special purpose vehicle and the fair value reported in the most recent scheme accounts
• the ABC will need to be valued annually by a suitable professional with appropriate professional indemnity cover. The valuation will need to meet certain requirements set out by the PPF
• trustees will be expected to obtain legal advice to ensure the ABC satisfies certain minimum legal requirements before giving the certificate

If the certifications cannot be given, or the PPF considers that the ABC’s value has been overstated, the PPF may partially recognise it (at a lower value) or, and it emphasises this will be the more common outcome, attribute a nil value.

This change in approach means that any payments in respect of ABCs which have been previously certified as a DRC will not be carried forward to the 2015/16 levy year (as was usually the case). Affected schemes will therefore need to certify a new DRC, capturing only non-ABC payments, for 2015/16.

Contingent assets

Although the PPF has previously strengthened its processes for certifying Type A contingent assets (in particular introducing the guarantor strength requirements in 2012/13), it continues to have concerns regarding the value being attributed to some guarantees.

The following further changes will therefore apply for the levy year 2015/16:

• trustees will be required to certify contingent assets with a fixed sum which they are confident the guarantor could pay if required (referred to as the “Realisable Recovery”)
• except where the guarantor is the ultimate parent and files consolidated accounts, guarantor insolvency scores will be adjusted to reflect the value of the guarantee they are potentially liable for.

Amended versions of the standard form contingent asset documentation will be published in December 2014, alongside the 2015/16 levy determination. Anyone wishing to put in place a new contingent asset between now and then should use the existing (December 2009) versions.

Last man standing schemes

LMSs are multi-employer arrangements which do not have an option or requirement to segregate assets on the cessation of a participating employer. Claims do not arise for the PPF on such schemes until the last employer becomes insolvent and so there is a reduction in the levy for LMSs.

The PPF has raised concerns that some schemes may have been incorrectly identifying themselves as an LMS scheme. To address this, TPR will write to all schemes which identify themselves as an LMS on Exchange to ask them to confirm that they have taken legal advice which supports that conclusion.  A scheme will only be treated as an LMS for the purposes of the levy if it has met these requirements and confirmed to TPR by 31 May 2015.

In addition, the PPF will revise the discount applied to LMSs so that it reflects the extent to which the arrangement is genuinely spreading the risk.

Next steps

The PPF will use insolvency scores from 31 October 2014 in the levy calculations for 2015/16. Therefore, before that date, trustees and employers must check that the data on the PPF’s portal and TPR’s exchange is accurate and up to date.  In addition, they should ensure that any necessary filing with Companies House etc has been completed so that the information sourced by Experian is correct.  Details of how to voluntarily submit accounts can be found on the PPF’s portal.  Any issues should be raised with Experian.

Schemes with Type A contingent assets or ABCs, and/or those that are reporting as LMSs, should consider what further action they will need to take in light of these changes. If you have any questions, please speak to your usual Sackers’ contact.