The PPF recently published its final proposals for the levy calculation over the next three years. It also announced that it has set its levy estimate at £550m for 2018-19. How will these changes impact on the levy amount for small DB schemes?
This is my third blog of 2017 about the PPF levy, reflecting the “interest” this subject generates with TDC’s clients. They have varying degrees of interest, depending on how much the levy amount is. This year’s risk based levy ranged from less than £1,000 to over £300,000, with an average of approximately £38,000. A painful amount for many sponsoring employers.
But next year is the first year of the new “triennium” covering 2018, 2019 and 2020. The new approach includes improvements to insolvency risk assessment (eg ensuring Experian scorecards are tailored to company size) and additional proposals to improve the assessment of scheme underfunding. The headline message is that these changes should benefit small employers more than large employers, but as we have said before, there are always winners and losers when changes are made to the levy calculation.
Levy scaling factor
The risk based levy scaling factor will reduce from 0.65 for this year to 0.48 for next year’s levy calculation (2018-19). This means that if your PPF deficit and insolvency risk were unchanged year on year (very unlikely in practice) your risk based levy would reduce by 26%. This reduction in scaling factor is primarily due to the PPF expecting to collect a total levy amount that is less than this year’s total.
The PPF proposes to rebuild five of the eight scorecards it uses to assess insolvency risk, leaving relatively unaltered the three scorecards that apply to subsidiary companies filing full accounts. If an employer is allocated to the “Non-subsidiaries £30m + turnover or large subsidiaries” scorecard, it will face a considerably higher levy. However, employers on the other scorecards could see lower levies. But this is lower levies in aggregate and on average. Again, there will be winners and losers.
If the sponsoring employer has a credit rating with Moody’s, Fitch or Standard & Poors, it will be used to determine the employer’s insolvency score. Different credit ratings correspond to the 10 levy bands, eg a credit rating of BBB results in an allocation to Band 3.
The average monthly insolvency score over the six month period from Oct 2017 to Mar 2018 will be used to allocate an employer to one of the 10 levy bands for 2018-19. For the following two years, the average will be calculated over a 12 month period.
The levy rates for employers who have been assessed as having a lower insolvency risk are to be significantly increased. The increases to the levy rates for Bands 1, 2 and 3 are proposed to be 65%, 35% and 17% respectively. For Band 1 employers, this increased levy rate more than offsets the lower scaling factor in the levy calculation, and likely to result in a higher levy amount.
Deficit reduction contributions (DRCs)
Two options are being introduced to simplify the certification of DRCs. An actuary can certify the actual DRCs paid in the relevant period now without the total being reduced by investment expenses or a trustee or employer can merely certify the DRCs in the recovery plan (from the latest triennial valuation). This second option is only available to schemes closed to future accrual, with a PPF value of liabilities less than £10m and total DRCs less than £1m.
TDC will continue to certify DRCs for its clients without charging an additional fee for this work.
New paperwork is being introduced for new contingent asset arrangements but existing Type A (parental guarantee) and Type B (security over cash, property or investments) arrangements can re certify for 2018-19 using documents that are currently in place. For Type A arrangements that result in a levy saving of at least £100,000, the trustees will have to obtain more extensive reporting on the ability of the guarantor to meet the amount certified.
Maximum risk based levy
Currently the calculation of the risk based levy cannot exceed 0.75% of the value of the scheme’s liabilities, on the PPF’s valuation basis. This maximum levy did apply to a few of TDC’s clients this year. The good news is that the maximum levy has been reduced to be 0.5% of the value of liabilities for each of the next three years.
The PPF will publish the final rules for the calculation of the 2018-19 levy in December 2017. The usual deadlines of end March for updating information on Scheme Returns and end April for certification of DRCs will apply for next year’s levy. In the meantime, we are available to help trustees and employers investigate the impact of these changes on the calculation of the levy for their scheme.