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Every eligible defined benefit (DB) scheme in the UK is obliged to pay an annual levy to support the PPF. It is essential that all employers and trustees understand their PPF levy, as the payments can be significant, are volatile year-on-year and cannot be recouped.
The PPF has introduced a number of changes to the way it calculates the levy it charges to all eligible DB schemes. These changes may have a material impact on the amount which schemes (and ultimately employers) will be liable to pay. The changes have created a number of winners and losers.
Manage your levy
Every scheme's levy is different and is made up of a very complex individual calculation, based on a combination of the employer's perceived insolvency risk and the risk associated with the scheme. There is a system of scorecards to segregate different types of organisations based on their insolvency risk. The scorecards place each scheme into one of ten insolvency risk bands, with the lowest band paying the least and the highest the most.
Depending on the output of this calculation, the levy can vary from barely registering against scheme expenses to being the highest expense. For trustees, any payment towards a PPF levy is potentially deficit repair contributions lost. For employers, even if levies are payable from scheme assets, this ultimately hits the employer in terms of extra cash requirements to reimburse the scheme. Therefore a lower PPF levy will result in a 'win-win' situation for the trustees and the employer.
We have successfully advised a number of clients of all sizes, helping them to move to a lower insolvency band and saving the sponsors a considerable amount of money. We can help trustees and employers to proactively manage the PPF levy and minimise the levies payable.
We offer services to both trustees and the corporate sponsors of pension schemes:
- highlight how the insolvency and scheme risk may be improved, ultimately reducing the annual levy
- monitor your levy to allow you to address unfavourable movements quickly
- forecast your annual levy charge, using our modelling software to provide an estimate of your scheme’s future levies
- assess the impact of business changes on your levy (i.e. the effect of a potential refinancing / reorganisation or acquisitions and disposals)
- implement a suite of levy reduction options (mortgage exclusion certificates, PPF complaint guarantees, contingent assets, asset backed contributions, DRC certification etc)
- provide guidance on annual guarantee certification and ABC valuations.