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UK pensions speedbrief – PPF levy 2019/20: time to start planning

  • United Kingdom
  • Pensions


The PPF has published its final levy rules for 2019/20, together with accompanying documents.  Aside from updated information on the treatment for levy purposes of new commercial defined benefit consolidators, there are few surprises as against the proposals set out in the September 2018 consultation.

However, there are some new points worth being aware of and, importantly, trustees should take careful note of the PPF’s finalised levy submission deadlines. In particular, schemes with PPF compliant Type A and Type B contingent assets containing a fixed cap should ensure they are well on track to re-execute and certify those by 31 March 2019 and to submit hard copy documents to the PPF’s offices by 5pm the following day.  If they do not, the contingent asset will not receive levy credit for 2019/20.  

General points 

Most of the proposals in the PPF’s September 2018 consultation (described in our speedbrief here) have been confirmed.  In particular: 

  • the total levy the PPF expects to collect is confirmed as £500 million, down from £550 million in 2018/19 
  • clarifications have been made in relation to deficit reduction certificates, notably around the treatment of pension increase exchanges  
  • the use of the S&P credit model will not be extended to regulated utilities
  • improvements are planned to the levy payment process - in the short term these will focus on the criteria for payment by instalments.

Re-execution of Type A and B contingent assets

Schemes seeking levy credit for 2019/20, will need to re-execute pre-18 January 2018 Type A (parent or group company guarantee) and Type B (security over cash, real estate and securities) contingent assets that include a fixed sum maximum amount (including where this is part of a “lower of” formula). This should be done using the current edition of the standard form agreements available on the PPF’s website. The re-executed versions must be certified by midnight on 31 March 2019 (a Sunday) and hard copies must also reach the PPF’s Croydon office by 5pm on 1 April 2019, if they are to be recognised for levy purposes.

The steps and documents required for re-execution are broadly the same as if the contingent assets were brand new, including a new guarantee/security agreement (as applicable), a blackline against the PPF’s standard form, legal opinion, evidence of corporate benefit and, if relevant, guarantor strength report. However, the PPF says it will accept “refresher” legal opinions and guarantor strength reports in certain circumstances.

The main changes introduced by the new standard form Type A and B agreements (January 2018 edition, as amended) concern the amendment and release criteria and, in relation to Type A guarantees, the option to include a pre-insolvency demand cap as well as the required post-insolvency demand cap.  As before, the standard forms can be varied but only where the trustees’ legal advisers have confirmed the changes do not have a materially detrimental effect on the rights of the trustees and the PPF has been notified.

In relation to Type B(ii)(security over real estate) agreements, note that existing security may need to be released early to ensure that timings in relation to Land Registry and Companies House filing practicalities for the new contingent asset are met.  The PPF would not expect to change the 2018/19 levy in these circumstances but asks that it is notified in the usual way of mid-year changes. 

Effect of recent case law / s179 valuations 

The PPF notes that the recent Lloyds Banking Group case on equalising benefits for the effect of GMPs (see our speedbrief here) may lead some scheme employers to make accounting adjustments to reflect increased scheme liabilities. This could in turn lead to a worsening in insolvency risk scores. The PPF was asked whether it would be willing to allow an adjustment to avoid a worsening in scores for affected employers.  It decided that an adjustment would not be appropriate on the basis that the ruling effectively confirms a liability that schemes already had.

Separately from its levy rules, the PPF also issued Q&As in December 2018 on how a number of recent cases affect s179 (PPF) valuations. These are summarised below. 

  • Lloyds Banking Group (on equalising for GMPs): Schemes that already have s179 valuations underway are not expected to allow for GMP equalisation. Schemes that are starting the s179 cycle are advised to start considering the effect of the judgment and which of the permissible equalisation methods they might adopt. 
  • Beaton (which looks at the treatment of transferred in benefits for PPF compensation purposes):  Schemes that already have a s179 valuation underway are not expected to take account of the Beaton case. Schemes that are starting the s179 cycle should consider the effect of the judgment on the valuation of protected liabilities given different tranches of benefit may need to be treated separately for PPF compensation cap purposes.
  • Hampshire (in which the European Court said that the PPF must pay at least 50% of members’ scheme benefits as compensation – see our speedbrief here):  For now, valuations should be carried out under the current s179 guidance and no additional allowance should be made as a result of Hampshire.

These Q&As describe the PPF’s interim position and are likely to be updated from time to time.

Commercial consolidator vehicles

The PPF has developed its thinking in relation to commercial defined benefit consolidators following comments received during the consultation process.  These are described as “a new kind of risk” not envisaged when the PPF was established.  As such, the PPF is keen to ensure that conventional schemes do not provide a cross-subsidy to consolidators. The methodology chosen for consolidators will be based broadly on that currently used for schemes without a substantive sponsor.

The definition of a “commercial consolidator” is drafted widely in the levy determination (Rule C6) and could potentially capture other types of schemes that consolidate liabilities from elsewhere, including a scheme within a wide corporate group. The PPF considers, however, that a flexible definition is necessary for now. It intends to use its wide discretion within this definition to exclude schemes that it considers ought not to be covered.  The PPF asks schemes undertaking activity that they think might bring them within the definition to discuss their plans with the Regulator and the PPF.

The PPF will take a “principles based approach” to the recognition of consolidators’ buffer funds.  Buffer fund assets may be recognised in levy calculations so long as they are, broadly, held securely and able to be accessed by the scheme when required (and that legal advice has been obtained to confirm this). 

The PPF recognises that that its approach will need to change as the consolidator market and regulations take shape.

Other issues

Some additional points to note are set out below. 

  • The PPF acknowledges that it has learnt some lessons in relation to the guarantor strength report (the new report introduced last year, mandatory for Type A contingent assets expected to result in a levy saving of £100,000 or more). These include that the provider of the report must be an independent external adviser and that the duty of care requirement may not be caveated by reference to any separate terms between the adviser and the trustees.  Trustees and advisers preparing guarantor strength reports should review the PPF’s requirements in detail. If the report is not compliant, the contingent asset may not be recognised by the PPF.
  • The PPF warns that planned changes to the S&P credit model for scores generated in 2019/20 (affecting levies in 2020/21) are likely to result in a worsening in letter grade scores of one notch for most banks and building societies scored by the credit model.
  • The PPF plans to contact “special category” employers (a new category introduced last year) asking for confirmation that their status has not changed.
  • Invoicing will begin from early September, with larger sums generally invoiced first.

It is likely that trustees and employers will be receiving actuarial advice at this time on the anticipated levy for 2019/20.  As such, it is important for schemes to ensure that proper consideration is given to the structure and calculation of the PPF levy now so any appropriate steps can be taken ahead of the key deadlines at the end of March.