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PPF Levy 2020/21: deadlines are approaching

  • United Kingdom
  • Pensions

31-01-2020

In December 2019 the PPF published its final levy rules for 2020/21, together with accompanying documents. There are few changes to the rules compared to the previous levy year, and they are broadly in line with the proposals set out in the PPF’s consultation document in September 2019. However, there are certainly some new points to be aware of and, importantly, schemes should take careful note of the PPF’s finalised levy submission deadlines.

General points

General points to note are as follows:

  • the 2020/21 levy year is the last year of the PPF’s current levy triennium during which the PPF is seeking to maintain stability within the rules
  • the total levy the PPF expects to collect is £620 million, up from c.£575 million in 2019/20. The PPF says this is due largely to falling gilt yields worsening scheme funding levels
  • the levy scaling factor and multiplier will remain at 0.48 and 0.000021 respectively
  • the PPF says that, in aggregate, it expects 2020/21 levy invoices to be around 8% higher than for the previous levy year, but any increase for an individual scheme will depend on the risk characteristics of that scheme
  • an amendment has been made to the Small Accounts definition and there are changes to recalibrate the S&P credit model (backdated to April 2019) which is used to score banks and building societies that don’t have a credit rating
  • no amendments have been made to the standard form contingent asset documents this year

Other key points are set out below.

Type A contingent assets

Since the 2018/19 levy year, schemes with a Type A contingent asset (parent or group company guarantee) which generates a levy reduction of £100,000 or more for a particular year are required to submit a guarantor strength report which complies with the PPF’s guidance (schemes can voluntarily provide reports for levy savings below this threshold).

In the 2020/21 levy rules, the PPF has updated parts of its guidance on guarantor strength reports. The changes are aimed at discouraging a “tick box” approach to assessing the ability of the guarantor to meet the amount guaranteed under the contingent asset, and encouraging one which promotes a more holistic assessment of guarantor strength and greater reliance on the professional adviser’s judgment. The revised guidance is therefore intended to be less prescriptive about what must be included within guarantor strength reports, and there is a notable change in language from “must” and “will” to “should” and “may”. That said, the guidance does set out a non-exhaustive list of issues that the PPF expects to be covered in reports, and where one (or more) of those issues isn’t relevant in a particular case, the PPF expects the report to explain the reasons for this. The PPF is clear that it generally expects its guidance to be followed except where there is “a good reason for doing something different” and that, if an alternative approach is adopted, it will need to be justified to the PPF.

Other points to note relating to Type A contingent assets are:

  • The PPF has clarified that the existence of a guarantor strength report does not preclude the PPF from considering the following on their own merit: (i) contingent assets where the guarantor is a service company and (ii) the application or disapplication of the guarantor-employer component in the levy formula (a guarantor-employer is a guarantor that is a scheme employer).
  • When certifying (or recertifying) a Type A contingent asset, trustees are required to certify a cash amount that they are satisfied the guarantor(s) could meet in the event of the insolvency of the scheme’s employer(s) – this is known as the “Realisable Recovery”. The PPF has clarified how the Realisable Recovery should be assessed where the guarantor is a guarantor-employer. The PPF has confirmed that, when assessing the Realisable Recovery in these circumstances, trustees should consider whether the immediate insolvency of all the employers other than the guarantor would be likely to lead to the insolvency of the guarantor-employer itself. Where this is the case and the guarantee ranks equally with the guarantor-employer’s section 75 debt, the PPF has confirmed that the Realisable Recovery should be reduced to reflect any resulting reduction in the anticipated recovery of the section 75 debt from the guarantor-employer.

GMP equalisation

In its September consultation, the PPF sought views on the potential impact of GMP equalisation adjustments on PPF scores.

The PPF has acknowledged that taking GMP equalisation costs into account in employer accounts could have an impact on an employer’s risk-based levy. However, it has stated that movements in the amount of an employer’s profit are unlikely (in insolation) to have an impact on PPF levy scores. That said, it notes that for “a very small number” of cases (generally where the cost of GMP equalisation has moved an employer from profit to loss), the impact could generate a move of up to two levy bands. The PPF acknowledges that this immediate impact on employers’ accounts does not reflect the reality that GMP equalisation costs will be met over a number of years and is therefore unlikely to materially affect insolvency risk.

As a result, provided certain conditions are met, the PPF is allowing affected employers to request an adjustment to the accounting figures used by the PPF. However, the PPF has emphasised that this is not a general departure from its view that information as reported in employers’ accounts should be used in scoring.

The PPF intends to produce a standard form for employers to complete and guidance in order to help them understand the appropriate evidence that will be required. Requests should be made within 28 days of Mean Scores being published by Experian – which is expected to be in early July 2020.

Bauer

In December 2019, the European Court of Justice reached a decision in the German case of Pensions-Sicherungs-Verein VVaG v Günther Bauer. A more detailed explanation of the case is set out in our speedbrief. However, in brief, the case related to the level of protection member states must provide for employee pensions in the event of employer insolvency. The PPF had already been required to adjust its compensation methodology following the decision in Hampshire v PPF (see our speedbrief) and the industry was waiting with interest to understand if Bauer would require further changes.

Whilst the decision in Bauer does impact the PPF, it appears that the decision is unlikely to cause the PPF to incur significant additional liabilities or significantly alter its compensation methodology. That said, some changes will be required and the PPF has stated that it is working through the implications of the judgment.

The 2020/21 levy rules were published prior to the publication of the Bauer decision and, whilst the PPF acknowledged that the judgment could impact the amount of levy that needs to be collected, it confirmed that no changes are being made to the 2020/21 levy to deal with the potential implications of this case. The PPF noted that the total levy it estimates it will collect under the rules for 2020/21 is already near the maximum permitted under legislation, so there would be very limited scope for increasing the amount in any event.

Deadlines

Generally, the submission deadline for taking action to minimise the 2020/21 PPF levy is midnight on 31 March 2020 (including for certification or recertification of contingent assets on Exchange). However, there are some other relevant deadlines, including:

  • contingent asset hard copy documents – to be delivered to the PPF by 5pm on 1 April 2020
  • deficit reduction contribution certificates – to be submitted via Exchange by 5pm on 30 April 2020
  • certification of block transfers – to be submitted via Exchange by 5pm on 30 June 2020

Schemes intending to certify or recertify contingent assets (or to take other levy mitigation steps) should therefore start the planning process as soon as possible.

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