2013/2014 PPF levy consultation

Introduction

The PPF’s recent consultation document sets out the basis on which it intends to charge the Pension Protection Levy (the “Levy”) for the 2013/14 levy year.

In this Alert:

• Key points
• Why is the levy rising?
• Contingent Assets
• Dates for your diary

Key points

• The Levy estimate for 2013/14 is £630 million, up from £550 million last year. A further rise is expected for 2014/15.
• The guidance for contingent assets will be revised to reflect the PPF’s recent experience, particularly in relation to the certification of guarantor strength by trustees.1

Why is the levy rising?

According to the PPF, risk has significantly increased in the last year. Schemes’ aggregate deficit has more than doubled and the PPF’s expected claims over a 12-month period have risen to around £2 billion before recoveries.

In addition, it appears likely to the PPF that the level of risk reduction provided by contingent assets will be lower than anticipated, as many have been withdrawn and new certifications for 2012/13 have been at a lower rate than in previous years.2

The PPF’s levy estimate for 2013/14 is close to the amount it now expects to collect for 2012/13. As a result, schemes whose risk moves in line with the average shift in risk over the year to 31 March 2013 are likely to see a levy bill in 2013/14 which is similar to their 2012/13 invoice.

If current market conditions persist, the PPF advises that a further rise in the Levy (probably of around 10%) is likely for 2014/15.

Contingent Assets

The PPF proposes the following limited changes to the Levy Rules:

• a relaxation3 of the requirements in relation to guarantors and custodians for Type B4 and Type C5 contingent assets, to recognise that current market conditions have resulted in the bank credit ratings of many financial institutions being downgraded;
• to simplify the drafting, a change to the description of the calculation process for Type A6 contingent assets. All Type A contingent assets are now covered by the same rules;
• clarification of the basis on which Type B(ii) contingent assets (security over real estate) should be valued.

Certification of guarantor strength

In the 2012/13 levy year, the PPF introduced a requirement for trustees to certify the guarantor’s ability to meet its obligations under a Type A contingent asset. It now intends to revise the Contingent Assets Guidance to reflect its experience and to further clarify what is expected of trustees in certifying a contingent asset. For example, it will note that, in some situations, it is appropriate to discount the value of the guarantor’s assets and/or profits when considering its strength.

As trustees will have received their first levy invoice using the new methodology, the PPF believes it should be easier for them to assess the value likely to be placed on a contingent asset in future levies. In the PPF’s opinion this “should reduce the likelihood of trustees forming a judgment about the guarantor on different information from that used by the [PPF], without placing an additional burden on [them] to undertake an entirely fresh calculation of the stressed / smoothed value of their assets / liabilities”.

Finally, the PPF warns that it will no longer give schemes “the benefit of the doubt” in relation to the certification. From 2013/14 onwards, it intends to test these assets “more rigorously”.

Dates for your diary

Key dates and deadlines for the 2013/14 levy year are:

• information from the scheme return submitted to Exchange by 5pm on 28 March 2013 will be used in the calculation of levies;
• insolvency risk will be measured using the annual average D&B failure score of each sponsoring employer measured on the last working day of each month, from 30 April 2012 to 28 March 2013;
• the deadline for certification and / or re-certification of contingent assets will be 5pm on 28 March 2013;7
• deficit reduction contributions that have been made up to and including 31 March 2013 must be certified by 5pm on 30 April 2013; and
• full block transfers that have taken place up to and including 31 March 2013 must be certified by 5pm on 28 June 2013.

We expect the final levy determination and contingent assets guidance for the 2013/14 levy year to be published in December as usual.

1 Please see our Alert: “Contingent assets 2012/13: is your guarantor good for the money?”dated 12 January 2012
2 The PPF attributes this, primarily, to the introduction of the requirement to certify guarantor strength
3 A credit rating of A- will now be required in place of AA-
4 Security over cash, UK real estate and securities
5 Letters of credit and bank guarantees
6 Group company guarantees
7 This is the last working day before Easter