2021/22 PPF LEVY – GOOD NEWS FOR SMALL SCHEMES

Just read the PPF Levy consultation.  It is quite refreshing.  Recognition, perhaps for the first time, of the particular problems of smaller schemes and a practical solution. Well done, PPF! If only the Regulator would get more enlightened and start to simplify the governance burden on smaller schemes.

I need to do little more that set out an extract from the 2021/22 PPF Levy consultation document

The inevitable complexity of the levy – if it is to measure risk across widely differing schemes appropriately – can mean that it is hard for a small scheme to ensure that its risk is accurately reflected.

Examples can include some / all of:

• Payments made into the scheme, that reduce the deficit and could be certified as deficit-reduction contributions (DRCs) may not be certified because the cost of doing so exceeds the benefit in terms of saving. We’ve sought to make DRCs easier to certify, but are still aware of schemes that could certify and don’t

• Risk reduction measures such as guarantees or asset backed structures may be in place but it isn’t cost-effective to ensure they are in a PPF compliant form and certified

• Information submitted about scheme assets may not be sufficiently detailed to ensure low risk assets are recognised and treated appropriately

• Valuations, which for some larger schemes are carried out annually (and typically result in a reduction in deficits) will only be carried out every three years, and may be more likely to need to use assumptions where it is not cost-effective to assess accurately. Given the obligation not to understate liabilities this may mean small scheme valuations have more of a tendency to be overstated

• Less resource to check bills and less likely to receive advice from scheme actuary on measures to reduce levy

• Many employers to such schemes may file smaller company accounts, which contain less information, and may make insolvency scores less accurate

In essence, the proposal is to halve the levy for schemes with PPF liabilities of less than £20m, with a reduction then being tapered up to liabilities of £50m (when the full levy continues to apply) and to reduce the levy cap from 0.5% to 0.25% of PPF levies.

On behalf of smaller schemes sponsors and trustees and cost-conscious advisers, BRAVO.

Chris Atkin, October 2020

To echo Chris, this is a very pragmatic and sensible approach adopted by the PPF and I hope the TPR might take note when considering their new funding approach.  In particular, some of the takeaways might be;

 – From the global perspective, smaller schemes do not have a material impact on the PPF therefore the TPR can, perhaps, take a more lenient view which takes into account the, potentially, significant costs of compliance that smaller schemes may face as a percentage of their scheme assets.

 – For smaller schemes the cost of obtaining the appropriate advice needs to be weighed up against the advantages of applying the flexibilities that are otherwise available in the system.  This can result in smaller schemes adopting a more prudent approach compared to larger schemes whether it is appropriate or not.  This might be addressed by reducing the burden of proof for smaller schemes and providing template documents that they might use to put in place arrangements and demonstrate compliance.

– Recognise the limitations in assessing both the asset risk and the insolvency risk for smaller schemes due in part to the less detailed information being provided and the cost of obtaining that information otherwise

Nick Atkin, October 2020