New accounting rules mean the PPF levy score may be distorted
Scheme sponsors have until 31st March to submit information if they qualify for a levy reduction as a result of this
Sponsors of multi-employer schemes, and sponsors who are not-for-profit, large, non-UK, part of a corporate group or a parent company are most likely to be able to reduce their levy significantly
The recent introduction of new accounting standard FRS102 has meant pension liabilities have been included in the accounts of some employers for the first time. As a result, the Experian score used to calculate an employer’s PPF levy may have declined. For example, a company whose financial strength has remained relatively stable may be treated as being in decline due to the additional liabilities introduced as a result of a change in accounting standards. This distortion could lead to a higher levy payment.
According to Punter Southall’s analysis, sponsors of multi-employer schemes are the most likely beneficiaries if they previously disclosed on a defined contribution basis because they could not allocate assets and liabilities across employers. Sponsors who are not-for-profit, very large, non-UK, part of a corporate group or are an ultimate parent company could also benefit.
Punter Southall’s analysis also shows that it is not just the disclosure of pensions in company accounts that has impacted the scores. Some sponsors could benefit by submitting voluntary information about how their non-pension assets and liabilities have been impacted by new accounting standards. For example, it has seen cases where the treatment of goodwill under FRS102 has adversely impacted the score, and submitting information about the revised treatment could improve the score and so reduce the levy.
Kevin Burgess, Senior Consultant and head of PPF levy work at Punter Southall, comments: “This is a potentially significant and valuable saving. The PPF is not expecting the impact of voluntary submission to be significant across the DB pension scheme universe as a whole, but our analysis suggests some individual schemes could see significant reductions in their levy.
“The challenge is the timescale to take advantage of this. There are only a handful of weeks left until the 31st March deadline that has been set by the PPF. The good news is that this is relatively quick and easy to investigate and likewise submitting the information to Experian is easy to do. In addition, the score improvements will be backdated to when the first set of accounts prepared under the new accounting standard were filed.
Case study: how an employer participating in a multi-employer scheme could reduce its levy by 25%
• This scheme has several sponsoring employers, all of which are charities
• The scheme could not previously identify the share of pension assets/liabilities across all employers, so each employer disclosed on a defined contribution basis
• For charities, Experian compares the latest total net asset figure to the equivalent figure from three years earlier
• For one of the charities that sponsors the scheme, its 2016 accounts show a total net asset figure of £85,000, whereas the 2013 accounts show £260,000
• As this is a 67% reduction in total net assets, Experian applies a heavy penalty to the score
• The 2016 accounts were the first prepared under the new accounting standard. They showed a pension deficit for the first time, and the 2015 figures were restated to include a pension deficit of £135,000
• The comparison between the 2013 and 2016 total net asset figure is therefore distorted by the deficit being included in the 2016 figure but not the 2013 figure
• Submitting information to Experian regarding the pension deficit means that Experian will amend the 2013 total net asset figure to allow for a pension deficit of £135,000
• This will reduce the 2013 total net assets used on the score from £260,000 to £125,000
• Comparing the 2016 total net asset figure of £85,000 to the revised 2013 figure of £125,000 results in a reduction in total net assets of 32% rather than 67%
• Experian views this more favourably which improves the Experian score
• This improvement will be backdated to when the first set of accounts prepared under the new accounting standard were filed
• The improved scores change the levy band from 4 to 3
• As a result, this employer saves 25% on their share of the risk-based levy
• Other employers in this multi-employer scheme will also benefit from submitting voluntary information and there could be a substantial reduction to the levy for the scheme as a whole
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