Pensions World

Significant levy savings are possible by making some simple changes says Anthony Hilton, Evening Standard

The chances are that over the next few years the Pension Protection Fund (PPF) will increase the levy on the still operating defined benefit (DB) schemes through which it funds its activities and ensures the solvency of the scheme, in the face of what looks likely to be a steady increase in the financial pressures upon it.

The fund itself suffers in the way all DB schemes suffer when interest rates are low, because the discounted liabilities increase and this increases the notional size of the deficit. It faces the additional problem that the recession is increasing the incidence of corporate bankruptcy and this is likely to add significantly to the number of schemes it will have to take on. Many might be carrying deficits which will do further damage to the overall level of the fund. And a third issue is that the pool of assets from which it can collect its levy may sink over time with the progressive closure of DB funds and the growing number bought out by insurance companies, so the impact on those remaining will be proportionately higher.

Marked improvement

Faced with the prospect of an ever growing levy, there are things companies can do. In particular, it pays to work to minimise the risk based element of the levy, a calculation which reflects the Moody or Standard & Poor credit rating if it is a big company or the one provided by Dun & Bradstreet (D & B) if it is smaller. This is where the company seeking to reduce its levy should focus its attention.

Now, there is not much which can be done, short term, to persuade Moody or Standard & Poor to deliver a ratings upgrade to a big company. It can, however, be a different story in the smaller company space where D & B ratings are used. Indeed Xafinity, one of our leading pensions advisory firms, has shown considerable success here by finding out what has prompted D & B to give a firm a poor rating and then working with its clients to improve the areas of concern. If having done so D & B can be persuaded to improve the rating then it can translate into a marked reduction the following year in the risk element of the PPF levy. Part of what Xafinity does is to ensure that D & B’s data about the company is accurate. It corrects information which gives a negative picture and removes out of date details of past difficulties. In presentations to clients Xafinity talks of one case where it delivered a saving to the client in terms of levy reduction of £1.7m, partly by upgrading the quality of the directors.

Improved scores

One of the key issues is indeed the quality of the board and major changes can be achieved by hiring non-executives with a good reputation and getting rid of those perceived to be weak. The relatively simple action of increasing the number of good directors and filing improved accounts with a greater level of disclosure moved one company’s score from 79 to 95. The saving in levy was £160,000.

In a second case the emphasis was on updating incorrect company details in the D & B records, by providing an accurate record of the number of employees. This, together with action to pay off outstanding invoices, increased the score from 89 to 95 and delivered a levy saving of £145,000. The action taken in a still smaller company was to satisfy the outstanding charges against the business and to reduce the value of invoices which were paid late to below £75. The impact on the score was a dramatic uplift from 49 to 75 which delivered a £70,000 saving on the levy.

Finally the simple expedient of paying trade suppliers more promptly at another client improved the score from 40 to 63 and saved £25,000. Now there may be companies which do not have the resources to inprove their payment terms, but in others it may simply be that they could not see the point of paying earlier. Perhaps they can see it now.

Anthony Hilton is financial editor, Evening Standard; anthony.hilton@standard.co.uk