The Pension Protection Fund (PPF) has issued its consultation on the levy Determination for the up and coming levy year, giving pension plans a glimpse of what they can expect when their 2020/21 invoice arrives. The headline is that, while the PPF anticipates no significant change in its approach to the levy, the expected levy collection for 2020/21 is £620m. This is £120m more than it expected to collect in the 2019/20 levy year (although the amount actually collected in 2019/20 was £75m higher than expected, at £575m, due to lower than expected improvements in both insolvency scores and scheme funding).
An increase in the overall amount to be collected will probably not come as a surprise but an average 8% rise (when compared with the £575m collected in 2019/20) may be higher than expected. The PPF explains that the rise reflects projected increases in plan liabilities and underfunding which it attributes to current market conditions and, in particular, the recent significant reduction in gilt yields.
This year, the PPF has assumed large liabilities, notably in respect of the Kodak Pension Plan. Going forward, court cases concerning the protection of pension income on insolvency and uncertainties about global and UK markets have the potential to materially impact the risk and future liabilities the PPF faces, giving it little justification to modify the levy formula to reduce overall levy collection. Irrespective of the reasons, any increase in the PPF levy will be an unwelcome change for affected plans and sponsoring employers.
Who will see an increase in their PPF levy?
Not all pension plans will be affected by the expected increase in the overall levy. Where there has been no change in a plan's insolvency score or funding levels (for example, due to appropriate hedging of liabilities) there may be no significant change in the plan's levy invoice.
Those plans which see an increase in scheme underfunding or detrimental changes in insolvency score will pose a greater risk to the PPF and will likely see their levy invoice increase.
What should trustees and employers do?
Now is the time for trustees and employers to consider what action they can take to reduce the levy payable for their pension plan. This could include, for example, implementing contingent asset agreements, re-executing existing agreements or agreeing deficit reduction contributions. The PPF recognises various forms of contingent asset agreement such as corporate guarantees, providing security over assets and letters of credit or demand guarantees.
All relevant data must be submitted to the PPF by the set deadline - see the PPF's proposed key dates below.
Other points to note
The PPF has made a few changes to the 2020/21 Determination, including:
- changes to its guidance in relation to guarantor strength reports - the requirements have been made less prescriptive with a view to ensuring that pension plans take a more holistic approach and avoid a tick box exercise
- clarifications specific to any guarantor employers and their treatment in the levy formula
- a recalibrated S&P Credit Model for employers in the banking sector that do not have a public credit rating (which is expected to lead to a worsening of scores for some) and
- clarification that the process undertaken by Experian to identify entities forming part of a group will be in accordance with its ordinary course of business or in line with reasonable practical endeavours.
It is also seeking views on how the levy rules need to be developed in future in respect of pension plans without a substantive sponsor and commercial consolidators.
Finally, the PPF reiterates its position in respect of GMP equalisation, namely that section 179 valuations with an effective date of December 2018 or later should include an assessment of the impact of the Lloyds case.
Responses to the consultation should be submitted by 5pm on 5 November 2019. The final Determination is usually issued in early December.
The PPF aims to maintain stability in its approach to the levy over a three year period. As the 2020/21 levy year will be last year of the PPF's third triennium, a full-scale review of the levy methodology will get underway in respect of the 2021/22 levy year, at which point levy payers may see significant changes in the PPF's approach to the levy.
Monthly Experian scores, credit ratings and S&P credit model scores to be used in the 2020/21 risk-based levy - Between 30 April 2019 and 31 March 2020
Deadline for providing updated information (to Experian) to impact on monthly Experian scores - One calendar month before the relevant score measurement date
Submission of scheme return data on Exchange - Midnight on 31 March 2020
Reference period over which funding is smoothed - 5 year period to 31 March 2020
Certification of contingent assets - Online by midnight 31 March 2020, hard copy documents by 5pm 31 March
Certification of asset-backed contributions (e-mailed to the PPF) - By midnight on 31 March 2020
Certificates impacting monthly Experian scores – mortgage exclusions, employee information, FRS 101/102 certificates - (emailed to Experian) - By midnight on 31 March 2020
Applications for special category employer status - By midnight on 31 March 2020
Certification of deficit-reduction contributions - By 5pm on 30 April 2020
Applications for exempt transfers - By 5pm on 30 April 2020
Certification of full block transfers - By 5pm on 30 June 2020
Invoicing starts - Autumn 2020