PPF changes welcome but data and classification issues spell financial shock for D&B ‘cliff edge cases'
Employers crossing into a lower Levy Band could see a 50% increase in their risk-based portion of the levy
Managing company data is key: Trustees and companies should now check D&B scores in the run up to each month end but….
‘Caveat emptor’ approach of the PPF to data entry continues to make human error costly
The Pension Protection Fund ( PPF) has announcedthat the new levy formula will be fixed for three years from 2012. The formula will average funding levels so that the levy is not affected by short-term volatility and will introduce an assessment of investment risk in the calculation. Ten new Levy Bands for assessing the risk of a company going bankrupt, and the value of the levy the scheme needs to pay as a result, will also be introduced. The changes have come after criticism that the levy fluctuated year on year making financial planning for trustees and companies difficult.
Mercer welcomes the changes suggested by the PPF but points out that the calculation of the Levy could have profoundly negative financial implications for schemes when sponsoring companies are moved into a lower Levy band – so called ‘cliff edge case’ companies. Companies are assigned to a Levy Band based on a month-end average of their D&B* scores, which convey the likelihood of the company becoming insolvent. For some, moving by a single Levy Band could increase the risk-based portion of the levy by more than 50%.
According to Mike Fenton, Principal at Mercer and PPF specialist, “Overall, we agree with the direction of travel taken by the PPF’s new levy policy. However, if the new regime had been implemented this year, the PPF has estimated that 60% of schemes would have seen their levy increase and 10% would have seen it double. Since the changes also mean that most schemes with strong employers will see proportionately bigger levy increases, it’s likely that the levy will become financially significant to a larger proportion of the PPF’s stakeholders.”
While the PPF has stated that more details will be published in the autumn, Mercer is advising trustees and companies to monitor their D&B scores to ensure they are as high as possible on the last working day of every month.
The PPF will continue to use data entered using the Pensions Regulator’s Exchange system to calculate the levy and, Mercer understands, it intends to continue to follow its existing policy of not permitting trustees to change data which proves to have been entered incorrectly.
Deborah Cooper, Head of Mercer’s Retirement Research Group, commented: “Eligible schemes have no alternative but to pay the levy to the PPF, so the PPF is like a tax-raising body. But if I make a mistake on my self assessment form this year, HMRC will let me correct it and reassess the tax I owe. The same is not true with the PPF. If a mistake results in a scheme paying a higher levy than it would have done based on correct data, the PPF will not necessarily refund the overpayment.”
“The PPF has played an important role in bringing additional security to defined benefit pension scheme members,” Dr Cooper added, “but it should not be able to behave in such an arbitrary and unreasonable way to those it relies on to finance that security. It is about to launch a new regime for determining how scheme levies should be calculated – we suggest that, when it amends its determination to take the new levy formula into account, it also includes a new policy allowing trustees to correct data used to calculate their levy, following receipt of the levy invoice.”
|
