Pension Protection Fund sets out its 2015/16 levy proposals

Transcription

1 Page 1 of 5 News Alert 2014/08 7 October 2014 Pension Protection Fund sets out its 2015/16 levy proposals At a glance The Pension Protection Fund (PPF) has formally set out its intentions for the 2015/16 pension protection levy having fine-tuned its proposals issued for consultation in May which focussed on the new Experian-based insolvency risk model. Except for the softening of its proposals on asset backed contributions, the PPF s decided view over a number of aspects is very similar to its original proposals. The message therefore stays the same as in May: taken together, the switch to Experian and the other changes will see the levy decrease by a small amount for a majority of schemes. However, there is a significant minority who will see sharp rises in levy with 600 schemes projected to have their bill increase by 50,000 or more. Given this, it is important to identify what the scheme position is and, if sharp rises are on the way, take whatever mitigation actions are available. Key Actions Employers Reassess budget for the estimated 2015/16 levy demand where this is met directly by the employer and consider risk-reduction measures it would be beneficial to implement. Ensure that the data held by Experian for the scheme s sponsoring employers is complete and accurate, and monitor and, where possible, improve the Experian scores. Trustees Work with the employer to maximise the Experian scores for the scheme s sponsoring employers. Obtain an initial estimate of the 2015/16 levy along with potential actions to minimise the levy demand. Given the significant changes being made compared to the 2014/15 levy framework, an earlier initial estimate may be more beneficial than awaiting the final determination.

2 Page 2 of 5 The Detail On 6 October, the Pension Protection Fund (PPF) published a combined Policy statement and Consultation document containing its proposals for the 2015/16 pension protection levy and its response to its May 2014 consultation on the levy formula for 2015/16 to 2017/18. The PPF has at the same time published its 2015/16 draft determination along with related technical documents. Consultation is by and large limited to whether the drafting of its technical documents is effective in delivering what is now decided policy. However, the PPF is also seeking views on its proposals in relation to the treatment of mortgage charges under the Experian model, and its draft asset backed contributions guidance (see below). This consultation closes on 13 November and final details of the 2015/16 PPF levy calculation are expected to be confirmed before Christmas. The PPF is aiming to raise 635m in 2015/16, around 10% lower than the amount it aimed to collect for 2014/15. To help achieve this, it proposes to reduce the parameters it sets to calculate the levy, in particular the risk-based levy scaling factor (from 0.73 to 0.65) and the scheme-based levy multiplier (from 56 to 21 for each 1m of smoothed liabilities). It has described the scaling factors as neutral, set to achieve the same levy collection as if there had been no change to the levy calculation methodology from last year. In further good news for schemes as a whole, the PPF also estimates that the total annual levy will decrease over the following two years, as expectations of underfunding improve with rising asset values and interest rates. In this News Alert we report mainly on the decisions that have now been taken. You may find it helpful to refer to our News Alert published on 3 June on the PPF s earlier proposals. The new insolvency risk model is going ahead with minor adjustments Following strong support for the proposed PPF-specific risk scores for employers that sponsor defined benefit pension schemes, the PPF has finalised the model subject to some relatively minor adjustments. As intended, this will lead to a large redistribution of PPF levies amongst schemes justified as delivering a significant improvement in the risk-reflectiveness of the levy. The impact on individual schemes could be very significant. The PPF has confirmed that: Scores will first be used in PPF levies from 31 October 2014 onwards.

3 Page 3 of 5 For the 2015/16 levy, a six month average of scores will be used in the levy calculation (using month-end scores from 31 October 2014 to 31 March 2015). In future years this will revert to the average of month-end scores over the year to 31 March, as under the previous system. Employers will be placed into one of ten levy bands of insolvency risk probabilities for use in the levy calculation (although some of the bands and a few of the risk probabilities within these bands have changed slightly from those proposed). Neither transitional protection nor the credit rating override considered as part of the PPF s consultation will be implemented. (Transitional protection would have assisted schemes that saw a significant increase in levy as a result of the move to the Experian model, at the expense of other levy payers. The credit rating override would have meant that entities with such a rating would have seen this rather than the Experian score used in the levy calculation). The controversial mortgage age variable (which measures the age of an entity s newest unsatisfied secured mortgage charge) will be retained, but with some types of charges disregarded providing the relevant criteria are met. Also, the PPF is now consulting on whether certain mortgages may be certified for exclusion from the model on grounds of materiality. It will clamp down on companies that deliberately aim to change their Experian scorecard by amending their corporate structure and consolidating their accounts, or incorporating a subsidiary. Not for profit organisations are to be assessed against a specific Experian scorecard reflecting their lower risk status (compared with other sectors), rather than being allocated automatically to the lowest risk band as under the D&B regime. The need to keep on top of Experian Pension Protection Scores A re-launched online portal, reflecting a number of changes, enables schemes to check the accuracy of the information held by Experian, on which their sponsoring employers scores are calculated. Changes to the Pension Protection Score may have arisen purely because of the submission of more up-to-date information. But there are other reasons including data taken from sources that were previously unavailable, improvements to the identification of parent companies and minor changes to the way in which the score itself is calculated for some companies. In particular, where financial data is not available on the ultimate parent, for example where it is based overseas, unknown scores will now be used in the Experian model; previously the most senior UK business was likely to have been classified as the ultimate parent in these situations. Given this, the PPF is strongly recommending that schemes check their position and provide Experian with any missing information, even if they have previously accessed the portal.

4 Page 4 of 5 Tougher treatment of Type A contingent assets (parental guarantee) For schemes that benefit from Type A contingent assets, the PPF has confirmed that trustees will now in all cases have to certify a fixed monetary amount of the guarantee that they are satisfied the guarantor could pay on the insolvency of the employer(s). Also, in most cases the guarantor s levy band will be adjusted to allow for the existence of the guarantee, depending on the change in gearing implied were the guarantor to be asked to meet the payment. The one exception is where the guarantor is the ultimate parent and files consolidated accounts (which already take into account the guaranteed companies pension liabilities), in which case no such adjustment would be made. Restriction in levy savings from asset backed contribution arrangements The PPF has confirmed that asset backed contribution (ABC) arrangements will be separately identified in the levy calculation, and the trustees will need to certify their value separately. The amount to be certified will be the lower of the fair value shown in the most recent scheme accounts, and the value on insolvency as determined by an appropriate professional. The PPF has also confirmed that, rather than recognising only ABCs where the underlying asset is UK property (as proposed earlier this year), it will not put any restriction on the type of underlying asset. Reduction in discount for associated last man standing schemes The PPF has confirmed that for associated last man standing schemes, instead of applying a simple multiplier of 0.9 to the insolvency risk probability used in levy calculations, from 2015/16 that multiplier will be between 0.9 and 1, giving larger discounts to schemes with more participating employers and whose members are more evenly spread between these employers. Schemes wishing to benefit from this discount will need to confirm that they have received legal advice which supports them being treated as last man standing. Deadlines for the 2015/16 levy season The proposed deadlines for providing information are as follows: 5pm on 31 March 2015 for the compulsory submission of scheme returns (including any voluntary section 179 valuations); 5pm on 31 March 2015 for certification of asset backed contributions; 5pm on 31 March 2015 for certification of mortgages (to Experian); 5pm on 31 March 2015 for certification or re-certification of contingent assets; 5pm on 30 April 2015 for certification of deficit-reduction contributions; 31 May 2015 for confirmation of legal advice on last man standing schemes status; and

5 Page 5 of 5 5pm on 30 June 2015 for certification of full block transfers that have taken place before 1 April Comment The now settled replacement insolvency risk model from Experian (for the discontinued D&B failure score system) will deliver a significant number of winners and losers, despite being inserted into an otherwise largely unchanged PPF levy framework. It is therefore important for schemes to obtain a full understanding of its impact and take appropriate action. As ever, doing nothing until invoicing starts next autumn is not an option. There are a number of opportunities for effective levy reduction in the run up to 31 March 2015, some of which require more urgent action than others. At the start of the second PPF levy triennium, comprehensive levy management will be key. This News Alert should not be relied upon for detailed advice or taken as an authoritative statement of the law. If you would like any assistance or further information on the contents of this News Alert, please contact David Everett or the partner who normally advises you at LCP on +44 (0) or by enquiries@lcp.uk.com. LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. LLP London, UK Tel: +44 (0) enquiries@lcp.uk.com LLP Winchester, UK Tel: +44 (0) enquiries@lcp.uk.com Belgium CVBA Brussels, Belgium Tel: +32 (0) info@lcpbe.com Ireland Limited Dublin, Ireland Tel: +353 (0) enquiries@lcpireland.com Netherlands B.V. Utrecht, Netherlands Tel: +31 (0) info@lcpnl.com UAE Abu Dhabi, UAE Tel: +971 (0) info@lcpgcc.com All rights to this document are reserved to LLP ( LCP ). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. LLP is a limited liability partnership registered in England and Wales with registered number OC LCP is a registered trademark in the UK (Regd. TM No ) and in the EU (Regd. TM No ). All partners are members of LLP. A list of members names is available for inspection at 95 Wigmore Street, London, W1U 1DQ, the firm s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. UAE operates under legal name Belgium Abu Dhabi, Foreign Branch of Belgium. LLP.