Consulting Actuaries

Higher PPF levies from 2015?

Royal London Consulting Actuaries

7 July 2014

Winners and losers

  • There will be more winners than losers.
  • The average PPF levy increase will be less than the average decrease.
  • Some will see a substantial increase in their PPF levy.

The Pension Protection Fund (PPF) is consulting on proposals to change how the PPF levy will be calculated from 2015 onwards.  The proposed changes will result in “winners and losers”. 

These changes are part of the PPF’s three yearly review process and will incorporate changes that flow from the PPF insolvency risk provider changing from Dun and Bradstreet to Experian.  The change to Experian is likely to get rid of some of the bugbears with the Dun and Bradstreet approach.

The PPF is proposing to keep other changes to a minimum but will make a few other changes where these will result in more accurate assessment of the risk to the PPF. 

Experian and the levy review

The PPF has replaced Dunn and Bradstreet with Experian as its insolvency risk provider.  They are consulting on the changes they propose to make to how insolvency risk is assessed and how the levy is calculated as a result of this change.

  • The insolvency risk model employed by Experian will be based on employers with defined benefit schemes only – it is PPF specific.
  • The PPF specific Experian model appears to determine more accurately the risk of employer insolvency than Experian’s proprietary model (Delphi).
  • For the 2015/16 levy year only scores for October 2014 to March 2015 will be used to calculate the insolvency risk.  This will allow a period of a few months for scores and data to be checked and verified by Trustees before they are “used in anger”.
  • No transitional protection is envisaged but the PPF has proposed such protection for schemes where the increase in their levy is over 200%, if sufficient stakeholders wish this.  However, the PPF would still get its money, by recouping an extra £100M from the scheme based element of the levy.

Winners and losers

For every 3 schemes that gain as a result of the changes, 2 will lose out.  As a result the average increase in levy will be one and half times the average decrease.

Employers will be more evenly spread across the 10 insolvency bands. As a result, many employers will drop one band or more.

  • Dropping one band however will actually result in a drop in insolvency risk (and PPF levy) for many (but not all) employers.

  • Dropping more than one band will lead to an increase in insolvency risk and PPF levy. Some employers will drop a number of bands, leading to potentially large increases in their PPF levy.

New Experian web portal

  • Trustees should access the new portal to review their Experian scores and check the data used to calculate these before October 2014.

Bugbears fixed

The PPF has listened to users and a number of bugbears have been addressed.

  • Details will be provided of how insolvency scores are calculated.
  • Schemes will be able to see what data is being used to calculate their scores, through a web portal.
  • Trade payment data will only be used in limited circumstances, where other data is scarce.
  • Financial data only is used.
  • Trustees can monitor scores and data through a web portal and set up alerts for free.
  • The PPF started contacting Trustees with details of how to access the new portal shortly after 29 May 2014.  Trustees will be able to grant “administrator” access to third parties such as their advisers.

Other changes

Parent or Group Company guarantees

  • The PPF calls these “Type A” Contingent assets.  The impact of a guarantee being in place will now be reflected in the guarantor’s insolvency risk.

Asset backed contributions

  • The approach will be altered to reflect the extent to which the risk is genuinely spread.

Last man standing schemes

  • The discount given for last man standing schemes will be changed to better reflect the extent to which the arrangement genuinely spreads the risk.
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