PPF Levy Changes: Take Action Now

The Pension Protection Fund (PPF) was established to act as a lifeboat in respect of pensions of workers whose employer suffers an insolvency event. It is funded partly by the annual collection of levies on defined benefit pension schemes. The levies are calculated by the allocation of pension scheme employers to scorecards based on their financial metrics and their assessed risk of insolvency.

For the 2018/19 year the PPF has made a number of changes to the way it calculates the allocation of the Levy. These may have a material effect on the amount which schemes (and ultimately employers) have to pay.In particular the rules around "Type A" contingent assets (parent or group company guarantee of a pension scheme employer's obligations) have been changed. Type A guarantees can be used to reduce the amount of the levy payable where the guarantor's insolvency risk is lower than the pension scheme employer. Reductions can be substantial. Trustees of pension schemes also have to certify the "realisable recovery" - the cash sum they believe could be obtained from any guarantor in an insolvency situation.

There has been a relaxation in the calculation of realisable recovery. The PPF will no longer require multiple guarantors to each be able to pay the realisable recovery in full and for 2018/19 will allow individual guarantors to submit their own contingent asset certificate setting out the cash sum it can pay towards the multiple employer liability.

However, the PPF has beefed up its requirements relating to guarantor strength supporting Type A guarantees. Where the levy reduction resulting from a Type A guarantee would be £100,000 or more, the trustees will need to obtain a guarantor strength report from a covenant adviser before 29 March 2018, in accordance with PPF guidance. If they do not obtain such a report, then the PPF can decide to ignore the Type A guarantee for levy calculation purposes.

You should note that the PPF has amended its contingent asset agreements and expects employers to use the revised agreements for new or replacement agreements. It is not necessary to re-execute existing agreements (with the possible exception of Type A and B contingent assets which utilise a fixed cap).

The deadline for certification of such guarantees is midnight on Saturday 31 March 2018 however, hard copy documentation must be submitted to the PPF at its offices in Croydon by 5pm on Thursday 29 March 2018.

You should note that only minimal changes can be made to the standard form agreements; the PPF can (and will) refuse to recognise any agreement which fails to fully reflect the requirements of the standard form.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.