Pensions World

PPF draft levy determination for 2012/13

The Pension Protection Fund (PPF) has announced that its levy estimate for 2012/13 is £550m, the lowest levy to be set since its introduction. The reduction from the £600m target in 2011/12 reflects the improved funding position of the PPF as well as the move to the Consumer Prices Index for increasing PPF benefits.

The PPF has released a consultation and draft determination on the rules that will govern the calculation of the 2012/13 levy. The consultation sets out the various parameters in the levy calculation, which follow the principles set out in the May 2011 policy statement. The parameters are intended to be in place for the three years up to 2014/15, to provide some stability for schemes’ levies over that period, rather than using new factors every year as has been the practice to date.

Levy estimate and parameters

The PPF considers that collecting £550m annually over the three year period is appropriate in the light of the uncertain economic outlook, while maintaining its objective of having at least an 80% chance of becoming self-sufficient by 2030.

The levy structure will still have a risk based element and a scheme based element. The PPF has set a risk based levy scaling factor of 0.89. The risk based levy is calculated by multiplying a scheme’s underfunding and insolvency risks by this scaling factor.

The scheme based levy (using a multiplier of 0.0085%) will be used to cover the shortfall in levy income resulting from the cap on the risk based levy of 0.75% of a scheme’s smoothed PPF liabilities, designed to protect the weakest schemes. The scheme based levy is expected to make up 11% of the total levy income, a significant reduction from the current level of 20%.

Underfunding risk

The PPF will calculate a scheme’s smoothed funding position based on a five year average of market indices over the period to 31 March 2012. This will make levies less volatile from year to year. The smoothed assets and liabilities will then be adjusted (stressed) to reflect the risk posed to the PPF by a scheme’s investment strategy and by significant changes in interest rates and inflation.

For most schemes, the PPF will calculate the stressed position using details of the scheme’s asset split recorded on exchange. Schemes with PPF liabilities of more than £1.5bn will have to carry out their own bespoke stress test and submit this to the PPF (smaller schemes can choose to do so). This test takes account of a wider range of asset classes. The PPF has published guidance on the bespoke investment stress test. (A bespoke test will be expected in future years if a submission is made for 2012/13.)

Insolvency risk

Insolvency risk will be calculated by placing each employer into one of ten levy bands, based on their average D&B failure scores over the 12 months to the start of the levy year. For multi-employer schemes, the insolvency risk will be calculated by weighting each employer’s levy rate by the number of members attributed to each employer on exchange and multiplying by a factor according to the legal structure of the scheme.

Contingent assets

There will not be any changes to the types of contingent assets recognised for PPF levy purposes, but there will be some differences in the way in which they will be incorporated into the levy calculation.

Next steps

The deadline for submitting scheme information is 30 March 2012. Exchange will be available from November and guidance will be provided by the PPF to ensure accurate submission of data. As previously, deficit reduction contributions can be certified by 10 April 2012 and contingent assets certified or re-certified by 30 March 2012.

The consultation period ends on 2 November and the PPF will publish the final levy determination by the end of the year. The PPF says the figures are unlikely to change, so schemes can calculate an initial estimate of their potential 2012/13 levies. Although more precise figures will not be possible until market conditions and D&B scores at 30 March 2012 are known, schemes can gauge the impact of the new framework and consider any appropriate mitigating action.