First Briefing – PPF Levy 2012/13, November 2011

Introduction

In the PPF Levy 2012/13, June 2011 Briefing we looked at the new framework proposed by the PPF for the 2012/13 levy. The PPF has now issued the draft levy determination for the 2012/13 levy year. The determination provides detail on the proposed operation of the levy, sets out the levy parameters and proposes changes to the certification process for certain contingent assets. Consultation on the draft determination closed on 2 November 2011 and the final determination is expected to be published before the end of 2011.

This Briefing builds on our previous Briefing by highlighting new information that is contained in the draft determination. It also covers the actions that trustees and employers can take to manage the levy and the timescale by which those actions need to be completed.

Levy estimate

As part of its funding strategy, the PPF determines the total amount of levy it needs to collect to meet its liabilities. This is known as the levy estimate. The levy estimate is set at £550m for each of the 2012/13, 2013/14 and 2014/15 levy years. This is a £50m reduction from the levy estimate for 2011/12 of £600m.

Levy calculation

The total PPF levy is the sum of the Scheme Based Levy (“SBL”) and the Risk Based Levy (“RBL”).

Scheme Based Levy

SBL = Scheme based multiplier * PPF Liabilities.

Risk Based Levy

RBL = Underfunding Risk * Insolvency Risk (referred to as the Levy Rate) * Levy Scaling Factor.

To protect schemes with the weakest employers and the weakest funding positions, the Levy Rate is subject to a cap and the Risk Based Levy is also subject to an overall cap.

Investment risk

As discussed in the previous Briefing, the underfunding risk for levy years from 2012/13 onwards will reflect the investment risk posed by the scheme’s asset portfolio. The PPF has now updated the stress tests it uses to assess investment risk.

Levy Rate

The PPF has also updated the methodology for deriving insolvency probabilities, reflected in the Levy Rate, to align it with market practice.

Dun & Bradstreet (“D&B”) will still be providing the failure scores for employers and these failure scores will still run from 1 to 100. However, for 2012/13 onwards, there are two changes being made:

    1. Failure scores will be collected on the last working day of each month (from 28 April 2011 to 30 March 2012) and then averaged.

    2. Rather than allocating a probability of insolvency to each failure score, the average failure score will be mapped to one of 10 levy bands. Each band will correspond to a different Levy Rate.

Distribution of levy between SBL and RBL

For levy years prior to 2012/13, the total PPF levy was calculated so that 20% of it comprised the SBL and the remaining 80% comprised the RBL. With effect from the 2012/13 levy year, this is changing so that the fixed 20%:80% distribution no longer applies, although this is subject to the proviso that the SBL cannot exceed 20% of the overall levy.

For the 2012/13 levy year, 89% of the levy is expected to come from the RBL, with the remaining 11% coming from the SBL. The SBL element of the 2012/13 levy purely reflects the cross-subsidy arising as a result of the cap on the RBL.

Contingent assets

The PPF is proposing to change the certification process in relation to Type A contingent assets. As a reminder, Type A contingent assets are parental or group company guarantees that are PPF-compliant.

What is changing?

From the 2012/13 levy onwards, schemes will be required to certify on Exchange that the guarantors could be expected to meet their full commitment under the contingent asset if called upon to do so at the date of the certificate. The PPF will also be taking active steps to satisfy itself that the financial strength of guarantors entering into Type A contingent assets arrangements is such that the reduction in levy resulting from recognition of that asset is consistent with the reduction in risk.

Winners and losers

The changes being made to the levy calculation will result in winners and losers.

It is expected that well-funded schemes and schemes with lower risk investment strategies will be the winners from these changes. The losers are likely to be very strong employers whose schemes are not particularly well-funded.

Actions

There are a number of actions that can be taken by trustees and employers to help manage the levy. These include:

By the last working day of each month from 28 April 2011 to 30 March 2012:

  • Monitor D&B Failure scores by supplying any necessary information to D&B.

By 5pm on 31 March 2012:

  • Ensure information input into Exchange is correct. In particular, it is crucial that the asset breakdown provided reflects the actual asset distribution held by the scheme.The Section 179 valuation information should be the latest available.
  • Certify / recertify contingent assets – Certificates to be provided via Exchange.

By 5pm on 10 April 2012:

  • Certify / recertify Deficit Reduction Contributions (“DRCs”) – Certificates to be provided via Exchange.

Further information

For more detail please see our full First Briefing on the “2012/13 PPF Levy, November 2011” which also includes:

  • A table of the stress tests used by the PPF for the 2012/13 levy;
  • A table detailing the levy bands corresponding to D&B failure scores for determining the Levy Rate;
  • Information on the levy parameters;
  • Further information on how changes to contingent assets will be taken into account for the 2012/13 levy; and
  • More actions that can be taken by trustees and employers to help manage the levy.

This can be found along with past briefings on our website. Alternatively for further information please contact us.

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