Act now to reduce your PPF levy for 2018/19

The headline figures for the 2018/19 levy are as proposed in the consultation launched last September. The levy amount that the PPF is seeking to collect for 2018/19 is £550 million, 10% lower than the £615 million levy estimate for 2017/18. 

Changes to the levy rules

The PPF is implementing proposals, contained in its September consultation, to change the way insolvency risk is assessed for the purposes of the levy. These include:

• Using credit ratings for rated entities (instead of using the PPF-specific model score) and Standard and Poor’s (S&P) credit model for regulated financial institutions which are not rated
• Updating the way in which investment risk is taken into account through changes to the stresses applied to assets and liabilities.

Some schemes will find that their levy has increased and some will find that it has gone down.

Changes to contingent assets used to reduce the PPF levy

The PPF has reviewed the actions available to mitigate the amount of levy payable by schemes. In particular, it was concerned to ensure that its standard form contingent asset agreements deliver legal certainty and provide genuine financial support to schemes in order to support a PPF levy reduction. When the PPF issued its final levy determination, it announced changes for the 2018/19 levy year. 

Standard form contingent assets

The PPF has published the final versions of its updated standard form contingent asset agreements, which it consulted on in October 2017. These are: Type A used for parent/group company guarantees; Type B used for security over assets such as real estate or securities; and Type C used for letters of credit and bank guarantees.

• For all types, the PPF has maintained the option of including a fluctuating cap based either on the PPF funding level or the section 75 debt amount, or a fixed cap, or a combination of the two
• Each contingent asset agreement makes clear that the fixed amount is unaffected by any claim or demand made prior to insolvency
• Where there is a fluctuating cap it is now clear that:
  • previous demands made on the contingent asset cannot alter the way in which that funding level or debt is calculated
  • the trustees may require the guarantor or chargor to reimburse them for costs and expenses incurred in calculating the funding level or debt
• New wording makes clear that the parties have the flexibility to agree any amendment to, or release from, the contingent asset (provided that the trustees can withhold consent, where reasonable to do so)
• Type A and Type B contingent assets have been altered to clarify the circumstances in which payments by the guarantor/chargor under the agreement will serve to reduce the fixed cap. To this end, the forms introduce the concept of a pre-insolvency demand cap and post-insolvency demand cap
• Contingent assets that cap the guarantor/chargor's liability at a fixed amount must include a figure for the post-insolvency demand cap. This will be the relevant figure to be taken into account for levy calculation purposes
• In addition, if the parties wish to cap the pre-insolvency liabilities of the guarantor/chargor, they can do this by reference either to a fixed sum or to the scheme's technical provisions' funding level. However, it cannot be smaller than the post-insolvency cap, less any pre-insolvency demands.

There is also a new requirement that trustees must obtain a guarantor strength report in circumstances where the Type A contingent asset would result in a levy saving of over £100,000. This must support the Realisable Recovery value being certified by the trustees. 

Do you need to re-execute on the new standard forms?

Whether a contingent asset needs to be executed in the new standard form in order for it to be certified with the PPF depends on when it is first executed, and what type of cap it contains, as follows:

• All contingent asset agreements first entered into on or after 18 January 2018 - new standard forms.
• Type A or Type B contingent assets entered into before 18 January 2018 that include a fluctuating cap - no need to re-execute on the new standard forms for the 2018/19 certification process (and likely no need to re-execute on the new standard forms for the 2019/20 certification process either).
• Type A or Type B contingent assets entered into before 18 January 2018 that include a fixed cap - no need to re-execute on the new standard forms for the 2018/19 certification process (but the PPF will likely require these to be re-executed on the new standard forms for the 2019/20 certification process). 

Deficit reduction contributions

The PPF confirmed its proposals to simplify the process for certifying Deficit-Reduction Contributions (DRCs). Schemes will no longer need to deduct investment management expenses when calculating the amount of the DRC to be certified. Smaller schemes also have the option to certify based on Recovery Plan payments.

Key dates