The PPF's plans to impose a new levy model on schemes that cease to have a substantive sponsor have received mixed reactions from the industry, writes Stephanie Baxter
The Pension Protection Fund's (PPF) plans to introduce a new levy rule for schemes that cease to have a sponsoring employer after a restructuring, have been met with controversy.
The lifeboat fund has been consulting on a new model to better reflect the risk these schemes could pose to the PPF and other levy-payers. It believes its current methodology for calculating levies, which assesses the sponsor's insolvency risk, would not be appropriate and instead wants to base the levy on the commonly-used pricing model for put options - Black-Scholes.
It will only be applied to sponsorless schemes set up from January this year, with the new BHS scheme expected to be the first.
While regulated apportionment arrangements (RAAs) are very rare with only 26 having ever been agreed, there has been speculation they could become more common as schemes become less affordable for some employers.
RAAs are available under pensions law to schemes where insolvency is reasonably likely within 12 months, if it is a better outcome for members than going into the PPF.
Impact on RAAs
Now there are concerns the new rule, which could result in a bigger levy for some schemes, could scupper future RAAs, which could be on the cards for the British Steel Pension Scheme (BSPS).
Yet Punter Southall Transaction Services senior consultant Martin Hunter dismisses such concerns and argues the change is necessary to ensure the levy reflects the risks posed by schemes without a substantive sponsor.
"A lot of people have said it would put a major spanner in the works for Tata Steel and others but as we've seen with the new BHS arrangement, there doesn't seem to be any bad air. If The Pensions Regulator (TPR) and the PPF are going to sign off on a deal like this in the first place, they'll only do it if the funding level is strong enough, that there's a pretty good chance the scheme will be able to pay its benefits, or slightly reduced benefits as in the case of the new BHS scheme."
He says the BSPS will therefore only be allowed to continue on a standalone basis if both TPR and the PPF can be convinced it will be able to adopt a low-risk investment strategy that gives it a high chance of being able to meet promised benefits.
"If it really does pose very little risk to the PPF, this should therefore still be reflected under the new framework, meaning its initial PPF levy would remain very small."
However, others question whether the PPF actually needs the new levy rule at all given very few schemes will be subject to it, a view shared by Lincoln Pensions actuary and senior adviser Francis Fernandes, who thinks there could be negative consequences.
He expects the new rule would significantly increase the levy for sponsorless schemes, unless they are funded well in excess of PPF benefits. This would make it harder to run on, given the higher levy would lead to deterioration in the funding position, further increasing the levy.
"If you started out at 90% funded against the PPF, they already think you're 10% underwater, so your premium is going to be really high."
The scheme would be forced to either enter the PPF, compromise benefits above PPF levels much sooner or at a reduced funding level than under the current rules.
Fernandes also thinks the options pricing model would be difficult to use:
"Derivatives are complex to price. There are a lot of assumptions going into Black-Scholes so they need to ensure the figures that come out are consistent with the pricing investment banks and insurers would give for a similar hedge."
Also, he says the levy for a scheme with no sponsor should be consistent with the normal levy charged for a large scheme with a tiny sponsor, as otherwise there could be a "cliff-edge that some could game".
Hunter disagrees with both points, arguing if the PPF's going to go down this route, "it's the best way to do it".
A different way?
But if very few schemes will come under the new rule, is there a case for just improving governance frameworks instead?
Fernandes says: "If there aren't that many cases then it would be better off looking through the other end of the process and put controls at the outset, which negates the need to have to charge a lot."
As previous RAAs will have included certain protections on a case-by-case basis, perhaps there is a need for consistency - especially if there are going to be more restructurings.
There could be a framework with restrictions on investment strategy and awarding of benefit increases above statutory minimum if the funding level falls below 110%, and a provision to wind up the scheme if funding falls below a certain level.
Fernandes argues these combined with quarterly rather than annual reporting, would give sufficient protection.
While some hope the PPF will reconsider its plans, it is unlikely to drop them given it has already confirmed the new BHS scheme will pay the new levy. The industry won't have to wait long as the lifeboat fund will finalise the rule in time to complete the 2017/18 levy determination, which will be published by the end of March.
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