There’s still time for employers and trustees to take steps to reduce the PPF 2016/17 levy …
….and the PPF expects you to look at doing so. If you don’t take action then proportionately your risk based levy may increase as other schemes and employers do take action to reduce their levy.
But the window of opportunity is short as the key deadline is midnight 31 March 2016 and compliance with the PPF requirements can be quite onerous so don’t delay.
If you miss the PPF deadlines your efforts, time and costs to reduce the levy will then be wasted.
For levy year 2016/17, the PPF is mainly going to continue with last year’s changes to the calculation of the employer solvency risk and it will continue to use the new PPF specific risk model operated by Experian who replaced D&B.
So how can Trustees and employers mitigate the levy bill if you received a nasty surprise rather than a pleasant surprise with your 2015/16 levy bill? And if you did receive a pleasant surprise how can you keep your levy down?
Here are ten action points.
Firstly it should be a joint effort by employers and Trustees
As the levy is based on:
- a scheme based levy ( assessed on the size of the scheme’s liabilities) – approximately 20% of the levy bill and
- the risk–based levy ( assessed on the likelihood of the scheme entering the PPF and the scheme’s funding level)- approximately 80% of the levy bill.
Secondly check employer and scheme data is accurate and complete
The PPF want to work out the likelihood of an employer failing in the next 12 months. So employers are marked on the basis of an individual score card, with the key score indicator (some 70 to 90% of the points) depending on the financial statement data. This assessment is based purely on financial information gathered from various public sources, such as the company’s latest accounts, group structure, annual returns to Companies House and so on. Different rules apply to not for profit organisations and charities, and other “one off” organisations where Experian use the information submitted to the Charity Commission as well as to Companies House. The PPF obtains Scheme information from the annual return which the Trustees submit.
- Employers and Trustees should make sure the information which Experian use to assess their employers is accurate and up to date. If it’s public information it needs to be lodged in the right place or if it’s specific information it must be submitted before the PPF’s deadlines to the PPF through the PPF portal. Employers will need to work with their Trustees as it is the Trustees who have primary access to what information the PPF holds through the PPF portal.
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The new system introduced last year adversely affected some employers particularly as it looks more broadly at the employer’s group whereas D&B historically tended only to be interested in the company’s or companies’ that had legal responsibility to fund the scheme. Other employers suffered because they were not prepared, perhaps because there were overseas sponsors involved, to disclose key financial information which Experian needs to be able to assess them. Educating the key people at these sponsors may help with this.
Thirdly improve the scheme’s funding level if possible.
- Certify the amount of contributions which have been paid to reduce any deficit since the last valuation.
- Investigate whether there is an optimal time for preparing the scheme’s s179 valuation so the PPF can more accurately assess the scheme’s liabilities, for example through the use of an out of cycle s179 valuation or, although this is more difficult to achieve) by aligning the scheme’s valuation date to 31 March.
- Explore what contingent assets may be available.
Fourthly confirm the legal position of “Last Man Standing” (LMS) schemes
- Trustees of LMS schemes need legal advice confirming that they are indeed LMS i.e. that their rules don’t contain any provisions which require or give the Trustees (or anyone else) a discretion to segregate the scheme’s assets on an employer ceasing to participate in the scheme. The idea is that multi-employer LMS schemes are less likely to fall into the PPF and should therefore pay a lower risk based levy as it is only when the last employer in that scheme becomes insolvent that the scheme will be eligible to join the PPF. Without this legal advice the PPF will decide that the scheme is not a LMS scheme i.e. it will pay the higher risk based levy.
Fifthly can any action be taken over possible PPF clawback of earlier levy payments for schemes wrongly classified as LMS
The PPF has now begun to write to schemes which the PPF think have wrongly classified themselves as LMS for earlier PPF levies and it’s looking at collecting underpayments i.e. through an additional levy.
- For schemes who incorrectly registered themselves as LMS with the PPF, it may be possible to enter into an amending deed to correct the position retrospectively and this may result in no additional PPF levy being payable. Whether this is possible will depend however upon the circumstances of each scheme. We advise regularly on this and will explore the position in relation to any particular scheme as each case is fact specific.
Sixthly consider what mortgage certifications and re-certifications might be needed
In the PPF’s view, mortgages are a powerful predicative variable as regards the risk of employer insolvency so look at these carefully. The PPF/Experian looks at the charges register at Companies House. As this is rather a blunt instrument, the PPF accepts voluntary mortgage certificates in certain circumstances from employers and this process has become quite refined.
- Certain types of mortgage can be disregarded for the risk based levy assessment as they are not predictive of an insolvency risk. These include refinancing mortgages and what this means has been broadened from last year, rent deposit and pension scheme mortgages. These kinds of mortgages are eligible for exclusion and will not need to be recertified. The PPF will carry forward all mortgage certifications that were accepted for the 2015/16 levy automatically.
- “Immaterial mortgages” have to be recertified annually because the amounts used for the purpose of calculating immateriality might vary from year to year. This includes revolving credit/overdraft facilities and charges over bank accounts.
- Take legal advice, which we can supply, to help determine if a mortgage falls within the excepted category and, in the case of immaterial mortgages, that it meets the PPF complex criteria. We can also help prepare the right officer’s certificate.
Seventh mitigate investment risk if possible
It may be appropriate for Trustees should remember, as a longer term consideration, when making their investment decisions that the PPF look at the scheme’s investment profile when calculating the levy.
- If Trustees haven’t already done so they can use the PPF portal “help file” to check that the scheme’s investments are correctly and accurately classified and they can ask their consultants to look at the PPF stress factors and advise on whether they are tolerable.
Eighth certify/re-certify any contingent assets
These include for PPF purposes, parent company or intra group guarantees, security over cash, property and shares, letters of credit from banks or insurers, bank/insurance guarantees and surety bonds
- The PPF recognise these as improving funding security, as long as all the stringent requirements have been fully followed. This is so even though ironically on insolvency the PPF do not necessarily collect much from contingent assets. However in recognition of this some quite difficult trustee decisions are involved in certifying and re-certifying these assets including some complicated legal considerations which again tend to be fact specific. We’re happy to assist with this on a case by case basis.
Ninth certify/re-certify Asset Backed Contribution arrangements (ABCs)
- ABCs are complex and bespoke and they remain uncommon but the PPF can recognise them for levy reduction purposes. For levy year 2016/17, the PPF have introduced a “lighter touch” approach to re-certification allowing Trustees to rely on previously obtained legal advice as long as the ABC arrangement has not changed.
- ABC arrangements have not yet been tested on an actual insolvency and until this happens it must difficult to determine their real value. Generally the system appears somewhat flawed if the advisers who set them up in the first place are then the ones who provide advice on their certification.
Tenth inform the PPF of any block transfers like scheme mergers/demergers /reconstructions
- Block transfers, i.e. the transfer of groups of members from one scheme to another, still occur in the context of scheme mergers, demergers and scheme reconstructions etc. If one has occurred it is possible to provide a block transfer certificate to the PPF with an estimate of the s179 valuation position or alternatively to submit a block transfer certificate as soon as the pension liabilities have been transferred. Without these flexibilities, it could be difficult in practice to get the timing right on this to coincide with the PPF deadlines.
Deadlines
It is extremely important to meet the PPF’s deadlines. While the PPF has discretion in some limited circumstances to extend them, in practice it doesn’t. So plan ahead!
The key deadline is midnight on 31 March 2016 to submit:
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Scheme Returns on Exchange.
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Contingent asset certificates on Exchange for certification or recertification together with hard copy documents as necessary to the PPF.
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Asset backed contribution certificates to the PPF.
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Mortgage exclusion certificates and supporting evidence to Experian.
Other deadlines:
5pm on 29 April 2016 – submit any certificate of deficit reduction contributions on Exchange.
5pm on 30 June 2016 – submit on Exchange certification of full block transfers.
Appeals
If it does all go wrong then it is possible to appeal with the first port of call being Experian. However beware as there is only limited scope for change if the Trustees and/or the employer has provided incorrect information or missed the deadlines- get things right first time round. As one would expect appeals will be successful if Experian has miscalculated. It’s worth noting employers can only appeal one or two months of Experian scores, not the whole year.
Appeals have to be made within 28 days from the PPF invoice so act quickly. Invoicing starts in Autumn 2016.
And finally remember paying the PPF levy this year will help the PPF fulfil its objective of being self-sufficient by 2030!
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