The PPF's David Taylor speaks to Stephanie Baxter about how it could reduce the pressure on smaller schemes, and how sponsors will be impacted by its planned levy changes
The Pension Protection Fund (PPF) is exploring a number of ways to make life easier for smaller schemes such as simplifying certain processes.
Speaking about its proposed changes to the levy for the next triennium from 2018/19, general counsel David Taylor says the PPF is considering a number of areas raised in last year's report from the Work and Pensions Committee's (WPC).
The select committee led by Frank Field had suggested the administration burden could be lowered for smaller schemes.
Taylor says the PPF is very mindful of difficulties these schemes face, and that there could be ways to alleviate some of the pressure.
"The levy has become more complicated over the years for smaller schemes as schemes at the larger and more fully advised end have wanted the PPF levy to be more accurate and take more things into account.
"The smaller schemes simply don't have the resources to spend a lot of money on advisers, which can be a barrier to some things we allow for in the levy such as contingent assets, or certifying deficit reduction contributions (DRCs)."
The latter is a good incentive as it allows sponsors to get credit in their levy through paying more into their schemes during the years between triennial valuations to help plug deficits. However, this comes at a cost by requiring actuarial calculations to file the certificates.
Taylor says: "For small schemes where DRCs may only be tens of thousands of pounds anyway, evidence shows it's not worth filling out the certificate, and so they don't pay for the actuary to fill it out and don't get the credit they ought to."
The PPF now wants to ease up the DRC certification process for smaller schemes, which could involve simplifying the calculation methodology. A more radical change would allow them to certify contributions paid under recovery plans as the corresponding DRC for a levy reduction.
The lifeboat fund has explored going even further, by simplifying the whole levy formula for smaller schemes through charging at a single level for insolvency risk, or charging a higher scheme-based levy but no risk-based levy.
However, it acknowledges this would be difficult. "If we do it in a way that creates winners and losers, the losers may feel simplification has not done them a lot of good, but if we do it in a way that only creates winners then we're not necessarily reflecting the risks properly," said Taylor.
The PPF is also considering the WPC's recommendation for a levy discount where schemes of any size demonstrate good governance. Back in 2011 the PPF had asked Mercer to look into it, but found the barriers were too high.
"We've looked at it previously, as we believe better governance provides better scheme outcomes, but the practical difficulty is how to measure it in a way to give credit for it in the levy. We don't want to end up with something that's just a tick-box approach or sets the bar so low that everyone satisfies it, or makes it incredibly complicated or encourages perverse incentives."
Changes to insolvency model
Alongside these considerations, the PPF's consultation contains concrete changes that would lead to almost two thirds of schemes (around 3,614) getting a levy reduction. Meanwhile, 1,033 schemes would see their levy increase, and 992 would not see any change.
The first proposal is ensuring scorecards are better tailored to company size so small and medium-sized enterprises (SMEs) and ‘not-for-profits' pay levies that better reflect their risks.
"Across not-for-profits as a whole there have been higher levels of insolvencies than when we first built the model," notes Taylor.
After including information from the Charities Commission, the PPF now has a scorecard that will better discriminate between not-for-profits - as some are big and robust while others are much weaker.
The change will lead to not-for-profits paying around 35% less in aggregate.
The second proposal is to use credit ratings for some of the largest employers, and a specific methodology for regulated financial services entities.
Taylor explains: "We've always known that building the Experian model is particularly difficult for stronger employers, because if there have been no or few insolvencies then it's difficult to say there's a correlation between particular data items and insolvency risk. So credit ratings make a lot of sense.
"Firms with a strong credit rating will be in the same position - or possibly even better. But for the relatively limited number of companies with credit ratings below investment grade, they may go down a few levy bands - and because they're sponsoring very large schemes with large deficits, they could pay a lot more."
The PPF had previously decided not to use credit ratings but now has more robust evidence on how to convert credit ratings into insolvency probabilities.
"The conversion we're doing now is more favourable than the one we looked at before, so it softens the blow a bit for employers that will be measured on credit ratings."
The consultation on the levy changes closes on 15 May.
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