As highlighted in its Autumn consultation on the 2017/18 levy rules, the PPF has for some time been developing an approach to how it would charge a levy for a scheme which ceased to have a substantive sponsor after a restructuring of its pension arrangements. The PPF’s standard methodology for calculating levies, a key element of which is an assessment of the insolvency risk posed by the sponsor, would not be appropriate for such a scheme.
David Taylor, Executive Director and General Counsel at the PPF, commented: “A key principle of the PPF levy is that it is as reflective of risk as possible. Schemes without a substantive sponsor present a different risk to the PPF from that posed by other schemes. We have developed a new approach to charging such a scheme an appropriate risk-reflective levy, not least to ensure there is no risk of cross-subsidy from existing levy payers.”
The new proposed charging methodology is based on a commonly used pricing model for valuing put options, which has then been adapted to the PPF’s particular circumstances.
The use of a methodology that is widely used to price comparable risks ensures that such a scheme will be charged an appropriate levy, reflecting the true risk it poses. The methodology also recognises that a scheme with no sponsor will always pose a bigger risk than an identical scheme which has a sponsor, however weak and should - therefore - always pay at least the same levy.
David Taylor added: “We will always operate in the best interests of our members and levy payers. This is new and evolving terrain and we need to be able to react with an appropriate levy if it is needed. Few if any schemes would themselves be directly affected by this rule in 2017/18 but we are keen to hear the views of stakeholders to inform the development of the framework.”
The full consultation document can be found here. The consultation will close on 6 March.
As communicated in December 2016, the final 2017/18 Levy Determination will be published by 31 March 2017. The finalised rule for schemes with no substantive sponsor will complete the changes to the Pension Protection Levy for 2017/18.
More substantial changes will be considered for the next triennium, starting in 2018/19, on which the PPF plans to consult in spring 2017.
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