The PPF’s proposed rules for calculating the 2021/22 levy seek to strike a balance between giving sponsors time to recover from the economic impact of Covid-19, whilst recognising the increased risks the PPF faces in the years ahead.
The PPF estimates that around 90% of schemes that pay a risk-based levy could expect to see a reduction in their levy relative to 2020/21 as a result of its proposals, which provide particular assistance for smaller schemes. These proposals include:
- introducing an adjustment to reduce the risk-based levy for smaller schemes
- reducing the risk-based levy cap for all schemes, and
- extending the flexible payment option for 2021/22 levy invoices.
The combined effect of the adjustment to the risk based levy for smaller schemes and the reduction to the risk-based levy cap (together with changes to the basis used to carry out section 179 valuations) means that the levy estimate for 2021/22 is £520m, a reduction of around £100m on the equivalent figure for 2020/21.
Given the current economic crisis and the risks this poses to the PPF, the PPF is planning to review and set the levy rules on an annual basis moving forwards rather than setting them in three year cycles as has previously been the case. This will give the PPF the flexibility to respond to emerging risks as the fallout from the economic impact of Covid-19 unfolds.
The consultation opened on 29 September and will close on 24 November 2020. The PPF expects to publish its response in early 2021.
Small scheme adjustment
Analysis by the PPF shows that smaller schemes are far more likely to pay the highest levies as a proportion of their scheme’s liabilities. This is due, in part, to the fact that smaller schemes may not be able to take the steps necessary to ensure that their risks are accurately reflected in the calculation of their levy. For example, smaller schemes may choose not to certify deficit reduction contributions as the cost of doing so may exceed the levy saving. In addition, the information submitted in relation to smaller scheme’s assets may not be sufficiently detailed to ensure low risk assets are recognised and smaller schemes may only prepare section 179 valuations every three years (compared to larger schemes which carry out valuations annually and which may result in a levy saving).
In recognition of the disadvantages that smaller schemes face, the PPF is proposing to halve the risk-based levy for the smallest schemes (i.e. schemes with less than £20m in liabilities) by applying a factor of 0.5 to their uncapped levy calculation. This reduction will be tapered for schemes with between £20m and £50m worth of assets to avoid a cliff edge, meaning only schemes with £50m or more in liabilities will be charged the full levy. It is estimated that this will reduce the amount the PPF collects by roughly £10 million.
To support schemes more generally, the PPF is also looking at ways to improve the information it gives to schemes to help them manage their levy. This should particularly help smaller schemes which are likely to receive more limited professional advice.
Reducing the risk-based levy cap
The PPF is also proposing to reduce the risk-based levy cap for all schemes from 0.5% to 0.25% of scheme liabilities. In recent years, the number of schemes capped has reduced significantly and the levies charged have risen (as liabilities have increased in the light of low gilt yields). The PPF has indicted that, in ordinary times, it would consider adjusting the cap downward to 0.35% or 0.3% in light of this. However, given the financial pressures on scheme sponsors over the next 12 to 18 months due to Covid-19 it is proposing to go further than this. It is estimated that the proposed reduction in the risk-based levy cap will benefit around 152 schemes and will reduce the amount the PPF collects by around £40m.
Reducing the risk-based levy cap, together with the small scheme adjustment should help reduce the number of schemes for which the levy is a high proportion of scheme liabilities. It should also reduce the size of the levy relative to the amount of recovery plan payments for a number of schemes. This will in turn help the sponsors of such schemes.
Extending easement measures introduced for Covid-19 impact
As well as taking steps which will reduce the levy for many (particularly smaller) schemes, the PPF has also announced that it plans to extend the payment flexibility that it introduced in the Summer and which enabled schemes and sponsors to request an extension to the normal 28 day levy payment period, where they could show they had been negatively affected by Covid-19. Where this easement applied, the PPF agreed to waive the interest charges that would normally accrue for late payment, for up to 90 days (as long as payment was made before the end of that 90-day period).
Whilst this easement was initially introduced in response to the cash flow difficulties many sponsors faced during lockdown, the PPF is proposing to extend it for the 2021/22 levy year to provide further assistance to scheme sponsors.
Lower levy estimate
The combined effect of the proposed changes to the levy rules together with the impact of updating the basis the PPF uses for section 179 valuations (to ensure this is in line with the latest insurance pricing) means that the levy estimate for 2021/22 is £520m, roughly £100m lower than the figure for 2020/21. This is despite the deterioration in insolvency risk scores and scheme underfunding caused by the economic impact of the measures introduced to limit the spread of Covid-19.
The decision to take steps to reduce the levy (at least in the short term) will come as a relief to many scheme sponsors. Whilst the PPF is mindful of the increasing uncertainty and risks that lie ahead, it is also conscious of the need to reduce the pressure on sponsors and schemes while they seek to recover from the financial impact of Covid-19. Based on the proposals contained in the consultation, roughly 90% of those paying a risk-based levy are expected see a reduction in their levy relative to their 2020/21 invoices.
The PPF entered the pandemic in a strong financial position and this means that it does not need to make significant short-term changes to its levy strategy. However, given that the PPF is almost certain to experience an increase in claims in the coming years it recognises that it will need to keep its approach under review and that increases to the levy in future years may be necessary.
Setting levy rules on an annual basis
In light of the continuing economic crisis and the risks associated with this, the PPF is proposing to move away from its triennial approach to setting the levy rules and to review and update them annually instead. This will enable the PPF to be more flexible in response to the emerging risks and the changes in insolvency risk scores as more data becomes available.
The decision to review the levy on an annual basis is also due, in part, to the fact that there may be changes to the asset information schemes provide the PPF from 2022/23 as a result of the Pension Regulator’s new DB funding Code which is expected to take effect in 2022. The PPF will be carrying out a joint review with the Regulator of what asset information schemes are required to submit as part of this process.
The PPF currently envisages a return to setting the rules for a multi-year period – of three years or potentially longer – from 2023/24.
Insolvency rates remain low… for now
Whilst Covid-19 has had a significant financial impact on schemes and sponsors, current insolvency rates remain low. The PPF believes that this temporary mismatch between the decline in economic activity and the limited number of insolvencies is due to the various Government schemes that have been put in place support businesses. It expects insolvency rates to increase as this support is withdrawn.
The PPF recognises the unique challenges faced by its credit scoring model as a result of Covid-19 and it is reviewing the performance of its scorecards during particular milestone periods so that it can identify any underperformance at an early stage. The first milestone was the lockdown period itself, the second is the period coming out of lockdown (July 2020 to November 2020) and the third will be the period directly following the end of the UK’s transition period after Brexit (January 2021 to March 2021).
The proposals for the 2021/22 PPF levy will be welcomed by schemes and sponsors, particularly smaller schemes and sponsors hit hard as a result of the Covid-19 pandemic. Whilst the PPF recognises the challenges and risks that lie ahead, its strong financial position going into the pandemic means that it is able to support schemes and sponsors, at least in the short term, and help alleviate some of the financial pressure on businesses. However, as the fallout from the current economic crisis unfolds tougher decisions are likely to lie ahead.