Out-Law News 2 min. read

Pension Protection Fund to incorporate large business credit ratings into risk assessments


Changes to the way in which the the levy payable for the defined benefit (DB) pensions ‘lifeboat’ fund is calculated should reduce payments from the businesses at least risk of insolvency, its general counsel has said.

The changes, which are subject to consultation and would apply from 2018/19, would however increase the levy for some of the largest employers, according to David Taylor of the Pension Protection Fund (PPF).

The consultation (72-page / 694KB PDF) closes on 15 May 2017. It proposes changing the way in which it calculates the levies for small and medium-sized businesses and not-for-profit businesses; incorporating credit ratings into its calculations for the largest employers; and a specific methodology for regulated financial services firms.

The PPF is also seeking views on some of the proposals made by the Work and Pensions Select Committee in its 2016 report, such as the possibility of a levy discount for good governance and reducing the administrative burden for smaller schemes. It is also considering whether to replace its current monthly scoring of employer solvency, or instead moving to an annual assessment based on employer solvency as of 31 March each year from 2018.

Although there would be “winners and losers” as a result of the changes, pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said that it was “hard to argue with the principle that the risk-based levy should be assessed as accurately as possible”.

“The larger businesses that see the greatest increases may wish to respond on the extent to which good governance – which they are well placed to provide – should result in a lower levy,” he said.

The PPF is funded by an annual levy payable by eligible DB schemes, which are schemes that promise a set level of pension once an employee reaches retirement age. It provides a certain amount of compensation to members of those schemes when the employer suffers a qualifying insolvency event, and where there are insufficient assets in the pension scheme to cover the amount of compensation that the PPF would pay.

The PPF revises its levy rules once every three years to apply to the next three-year period, or ‘triennium’. The idea is to give employers certainty about the amount that they will be expected to pay. The PPF is due to publish its final rules for the 2017/18 tax year, which will include a rule for new arrangements without a substantive employer, before the end of this month.

PPF general counsel David Taylor said that the proposed changes would “lead to a more accurate assessment of insolvency risk”.

“We expect almost two thirds of schemes to see a reduction in levies,” he said. “Some schemes – particularly some of those with very large employers – would see an increase, but smaller employers would, in aggregate, see reductions in levy.”

The PPF will publish a second consultation in the autumn, setting out the conclusions from the consultation process and seeking views on the final levy rules for 2018/19, he said.

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