UK pension funds face a big increase in the levy from the Pension Protection Fund (PPF) next year with further rises expected in 2014/15. Sacker & Partners LLP (Sackers), the UK’s leading specialist pensions law firm, offers six top tips for trustees and employers to help minimise the impact of the levy increase.
The PPF has announced that the collective levy it needs to raise from schemes will increase from £550 million to £630 million a year in 2013, adding substantial costs for trustees already under pressure from funding shortfalls.
Sackers’ tips for companies and trusties to follow to ensure their 2013/14 Levy invoices are as low as possible:
1. Check the scheme data
The levy is determined using data from the scheme’s Annual Return. Schemes should therefore ensure the data they have submitted to TPR on Exchange is accurate and up-to-date.
2. Inform the PPF of investment changes
The PPF takes into account the scheme’s investment risk using the asset allocation split on Exchange. If a scheme has taken steps to de-risk its investment strategy, Exchange should be updated accordingly.
3. Improve Dun & Bradstreet (D&B) ratings
The PPF relies on an average of the employer’s monthly D&B scores over the previous year to assess the risk of a scheme’s sponsoring employer going bust. In addition, operational issues such as late payment of invoices and the composition of the board can have an impact on an employer’s score and may be easy to address.
To improve their ratings, employers should:
- check the information D&B holds on all of the scheme’s participating employers is correct and up-to-date;
- look at the methodology D&B use in setting the failure score;
- consider appealing the score if the employer thinks it has been wrongly assessed.
4. Make deficit reduction contributions (DRCs)
The PPF defines DRCs as “an employer’s total contributions to the scheme (with no adjustment being made for investment returns) less:
- the cost of accrual of scheme benefits, subject to certain adjustments;
- scheme expenses incurred between valuations;
- the cost of augmentations granted since the previous valuation; and benefits paid out of the scheme.”
Improving the funding position of the scheme can reduce the levy, provided the DRCs are certified within the required time frame. If employers have agreed to make additional or accelerated contributions (for example, as part of scheme funding arrangements or in connection with a transaction or re-organisation) they should consider the timing of those payments to ensure that, if possible, they are taken into account in the levy calculation.
5. Use contingent assets
The PPF recognises that a scheme’s security can be improved by using contingent assets, such as a guarantee from a stronger company within the sponsoring employer’s group or security over assets (for example, property or securities).
Contingent assets will only be recognised if they meet certain requirements, including being in the PPF’s standard form, and they are submitted by the PPF’s deadline. If employers are considering providing additional security to their scheme they should consider whether they could use an arrangement which meets the PPF’s requirements and would therefore also reduce the scheme’s levy.
6. Update the section 179 valuation
The PPF assesses a scheme’s funding level using its section 179 valuation. These valuations are normally completed every three years, as part of the scheme’s triennial valuation. There is significant scope for the funding position to alter in that time. If there have been significant changes since the last section 179 valuation was completed, schemes should consider updating the valuation and re-submitting this to the PPF.
Helen Baker, partner at Sackers said: “It can take time to implement some of these changes, so schemes should therefore think about their options sooner rather than later to avoid the risk of running out of time. The PPF imposes tight deadlines and provisional dates for the 2013/14 levy have now been set. With the earliest deadlines arriving in March 2013, employers and trustees looking to avoid the worst of further expected levy increases should take action quickly.”
For further information, contact:
Sarah Evans-Toyne, Alistair Scott, Andrew Adam
+44 207 726 6111