Alan Collins discusses the benefits of the reduction in next years PPF levy, but warns that this is not cause for complacency.
Last month I talked about how the Pension Protection Fund (PPF) has improved processing times and introduced expert panels from across the pensions industry to implement continuous and appropriate improvement for schemes throughout the assessment process.
Well, the PPF have been in the news again this week following the results of this year's consultation. So what were the highlights and how will it affect the industry?
Scheme trustees and sponsoring employers will have received some comfort from the PPF's announcement regarding the 2015/16 levy. For example, the PPF intends to collect ?635m in 2015/16, around 10% less than the estimated intake for 2014/15 (invoices for which will have been issued for most schemes in the last few weeks) which will be a relief to many.
This lowered estimate filters through to the levy calculation, where the Scheme Based levy for each scheme will be more than 60% lower (all else being equal) and the Risk Based Levy (usually the significantly higher of the two) will be around 11% lower (again all else being equal).
Another welcome result comes through an easing in the PPF's interpretation of Asset-Backed Contributions (ABCs). The latest update confirms that all forms of ABCs will count towards reducing the levy, "provided the ABC is valued in a way that reflects the value to the PPF in the event of insolvency". Although an annual valuation of the asset is required, potentially increasing the cost of holding it, ABCs will still be a very effective PPF levy management tool for those schemes and employers which enter in to such agreements.
Further comfort should also be sought by the PPF's confirmation that they will consult on the issues raised around mortgage ages, and how recently the secured debts were taken on by the employer. Previously this resulted in some very negative outcomes for employers who had re-mortgaged loans, but the PPF has committed to finding a solution that means this (and associated charges unlikely to affect solvency) will not unfairly increase the levy.
With these improvements there still comes a warning for schemes to keep their houses in order. Mitigating your levy is still a vital action to be taken, especially as the 31 October deadline approaches for setting next year's levy. For small and medium-sized employers there is a risk that the recent move from D&B's scoring system to Experian will adversely affect their score around insolvency risk measurement – so I would suggest all trustees and employers check their current score now and do whatever they can to reduce this before the deadline.
No matter your thoughts on the levy, it is here to stay. The good news is that the PPF are taking steps to accommodate the changing ways that pension schemes are run, and how and where they invest their assets. There is however still a great responsibility on trustees and employers to maintain their focus. Monitoring your levy and taking all necessary steps to reduce it where possible, many of which are simply around meeting deadlines and providing appropriate documentation, is still the best way to reduce the cost to your scheme.
Written by Alan Collins, Head of Corporate Advisory Services at Spence & Partners.
