Changes in the way the PPF levy is calculated for defined benefit (DB) pension schemes means that levies are set to double for some employers for 2015/16. Taking a few key steps now to discover your scheme's expected levy and improve your insolvency risk could save you significant amounts annually.
From April 2015 the Pension Protection Fund (PPF) will introduce significant changes to the way it calculates the levy that funds it. While the PPF sends its bill to the pension scheme, it's usually the employer that pays. This will directly affect the amount of money a company has to pay and may ultimately cost employers tens or hundreds of thousands of pounds if not addressed. However, understanding how the changes will affect you and providing additional information as soon as possible could save companies significant amounts.
The PPF was set up in 2005 to act as a lifeboat fund in order to rescue the defined benefit pension schemes of companies that become insolvent and are unable to meet their funding obligations to the scheme. Every eligible DB pension scheme in the country pays a levy to fund it.
For the year 2015/16, which begins next April, the PPF has just published its levy policy statement and proposed levy rules for 2015/16 – and there are substantial changes, primarily due to the introduction of a new bespoke insolvency risk model developed by Experian. Other changes will affect so-called 'last man standing' (LMS) schemes and schemes where asset-backed contributions (ABCs) are used. In short, they may lead to significant levy increases for some schemes. The PPF itself has estimated that 25% of schemes may see levies, on average, more than double, while approximately 400 schemes’ bills could possibly rise by more than £100,000 compared with 2014/15.
For those adversely affected all may not be lost if they can act quickly. Every DB pension scheme's levy is different and is made up of a complex individual calculation. This calculation places each scheme into one of 10 insolvency risk bands, with the lowest band paying the least and the highest the most.
There are a number of key steps a company can take now that could potentially move a scheme to a lower insolvency band, and thus save finance directors and CFOs a considerable amount of money. These steps include the following:
- Obtaining a high-level understanding of the scheme insolvency score via the PPF online portal and consider how this could be improved.
- Building an understanding of the 'realisable recovery' from any employer guarantee (if a guarantee is not in place, consider the benefits of such an agreement).
- Understand the value of any ABCs on an insolvency and net present value (NPV) basis.
- Obtain legal advice that the scheme is LMS in nature and understand how the concentration of employees across the employers may reduce the LMS discount.
Having spoken to a number of clients, we know this is an area of concern. If you are affected by this issue and would like to discuss it further, please get in touch with your usual Grant Thornton contact, or email our DB pensions adviser: