Reduced PPF levy for small schemes!

This is the mouth watering headline message from the PPF’s consultation on the proposed changes to the levy calculation for the next three years. In its press release on 23 March 2017, the PPF said “We expect almost two thirds of schemes to see a reduction in levies. Some schemes – particularly some of those with very large employers – would see an increase, but smaller employers would, in aggregate, see reductions in levy.”

Before all the sponsoring employers rush out to celebrate, we need to be aware that there are always winners and losers when the PPF changes the way the levy is calculated. But hopefully many small schemes will benefit from a reduced levy in 2018, 2019 and 2020.

This initial consultation proposes changes to the assessment of solvency risk, considers allowances for risk reduction and examines a levy discount for good scheme governance. The PPF is seeking views on its proposals before 15 May 2017. A second consultation will follow in the autumn of 2017.

Insolvency risk

The PPF’s current model for measuring insolvency risk, developed with Experian, uses eight scorecards for segmenting sponsoring employers. The review of these scorecards aims to improve prediction and calibration of risks across all types of employers and schemes. The proposals for new scorecards are likely to impact very large employers (for which credit ratings are available), stand alone SMEs and not for profit entities. A threshold of £30m of turnover for non-subsidiaries is being introduced. Apparently, the new scorecards should produce (even) more stable insolvency risk scores and so the PPF is considering doing away with the averaging of monthly scores and simply using scores at 31 March each year.

The impact of these new scorecards is already being illustrated on Experian’s web portal in a box with the heading “Proposed Model Score Information (18/19)”. Please check this information to see if you are a winner (lower levy band) or a loser (higher levy band).

Reflecting the risk of small schemes

The PPF recognises that some small schemes, with fewer than 100 members, lack the resources to fully consider risk reduction measures such as the certification of Deficit Reduction Contributions (DRCs) and contingent asset arrangements. In this consultation, the PPF is asking for suggestions of improvements and simplifications that would particularly help smaller schemes. One proposal considers the process for certification of DRCs.

Certification of DRCs

In order to simplify the certification of DRCs, for smaller schemes in particular, the PPF has proposed two options to change the DRC calculation. Option a) simply ignores investment expenses, removing the requirement for them to be deducted from DRCs and option b) would allow schemes to certify the contributions paid under a recovery plan, bringing consistency with the triennial valuation. I like option a) as it could be argued that investment expenses are effectively taken from the gross investment return rather than an explicit deduction from DRCs. Option b) is more flawed as it disadvantages those employers who pay more than is stated in a Schedule of Contributions.

On this point about limited resources for small schemes, I have to take issue with the actuarial consultancies who charge four figure sums to their clients for the DRC certification calculation. If an employer has paid any DRCs since the last triennial valuation, then the Scheme Actuary should be able to quickly calculate the value of DRCs to certify to the PPF to reduce the levy, if only to a small extent. It does not seem right that the employer or trustees have to weigh up the cost of receiving this “advice” against the levy saving.

Good governance

The Work and Pensions Select Committee has recommended that the PPF re-examines how the levy framework could incentivise schemes to improve scheme governance. It will be interesting to see if the PPF is able to propose a practical, objective and transparent framework for a levy discount that reflects high standards of scheme governance by trustees.

Whilst this levy consultation is underway, it is business as usual for the current 2017-18 levy year. We will make sure that DRCs are certified where relevant for all our clients ahead of the deadline of 28 April 2017.