Pension Protection Levy 2012/13: Don’t leave it to the last minute!

Introduction

Significant changes to the levy framework and alterations to key aspects of the certification process for Type A contingent assets for the 2012/13 pension protection levy mean that planning ahead is vital.

In this Alert:

• Key Points
• 2012/13 Pension Protection Levy
• Underfunding and investment risk
• Insolvency risk
• Contingent Assets
• Partial block transfers
• Key dates for the levy year 2012/13
• Next steps

Key Points

• The Board of the PPF intends to fix the rules of the levy calculation for three years to deliver “stability and predictability”.
• Investment risk will be incorporated into the levy calculation for the first time.
• Schemes with new or existing Type A contingent assets will be required to certify that guarantors could be expected to meet their full commitment under the contingent asset if called upon to do so as at the date of the certificate.

2012/13 Pension Protection Levy

From the 2012/13 levy year under the new levy framework the PPF intends to fix the parameters of the levy for the next three years.

The risk-based levy scaling factor will be 0.89. This will be multiplied by a scheme’s insolvency risk and underfunding risk to calculate its risk-based levy. For the first time, the risk-based element of the levy will account for 89% of the total levy (up from 80%), with the scheme-based element (which is calculated by reference to a scheme’s liabilities) making up the remainder.

Underfunding and investment risk

The calculation of a scheme’s underfunding risk will incorporate two key changes, smoothing and investment risk:

Smoothing – measuring asset and liability values over a five year period to reduce volatility in the measurement of underfunding rather than using (as now) a value as at a single date.

Investment risk will be calculated using the asset split information that schemes report in Exchange. The help file on Exchange has been updated to provide guidance on classifying investments and schemes are encouraged to review their reported asset split closely in the light of this.

Schemes with protected PPF liabilities of £1.5 billion or more will be required to carry out a more detailed (“bespoke”) exercise. Other schemes may choose to report this additional information.

Insolvency risk

Insolvency risk will be measured by placing sponsoring employers into one of ten levy bands, based on their average monthly D&B failure score over the preceding year (rather than as at a given date). Schemes should ensure that D&B holds information on their employers that is as accurate and up to date as possible so that they are allocated an appropriate score. Given this change and the fact that the PPF intends to maintain the same terms for the next three years, it may well be worth employers taking steps to analyse and improve their failure scores or to use contingent assets.

Although it is likely that D&B will change their methodology in the next three years, the PPF has committed to working with them to ensure that the Board’s goals of stability and predictability can still be achieved.

Contingent Assets

Certification requirements for Type A assets are to be strengthened for new and existing contingent assets. Trustees will be required to establish and certify that a Type A guarantor could be expected to meet its full commitment under the contingent asset if called upon to do so as at the date of the certificate. We hope that guidance on satisfying this condition will be provided shortly.

Partial block transfers

From 2012/13, the PPF is removing the process by which partial transfers may be reported.

The PPF expects the transferring and receiving schemes to address the apportionment of levies and whether to undertake post-transfer section 179 valuations. If an updated valuation for the relevant year is not submitted, levies will be calculated using the pre-transfer valuations of the affected schemes.

Key dates for the levy year 2012/13

Next steps

TPR has started its annual request for completion of the scheme return. Schemes should ensure the information they give is accurate as there is no obligation on the PPF to use alternative data merely because incorrect information places the scheme at a disadvantage.

The PPF’s final Determination and Contingent Asset Guidance for 2012/13 are due to be published in December 2011.