PPF levy 2018/2019: time to start planning

9th January 2018

On 19 December 2017, the PPF published its final levy rules for 2018/19, together with accompanying documents.  As trailed in the September 2017 consultation, there are a number of new developments which mean that some defined benefit schemes, particularly those with PPF compliant contingent assets or whose employers have close links to government, may need to devote additional time and planning to PPF levy matters this year.

General points

Most of the proposals in the PPF’s September 2017 consultation have been confirmed, in particular:

  • the levy estimate is £550m, about 10% less than the previous year’s estimate and the lowest levy it has sought to collect  
  • the levy scaling factor will reduce from 0.65 to 0.48 and the risk based levy cap is down from 0.75% to 0.5% of liabilities
  • the existing ten levy band structure will be maintained and levy rates will be increased for Bands 1 to 3
  • changes to the Experian scorecard model (including the use of credit ratings and an industry specific model for financial institutions) will proceed broadly as proposed, and
  • the deficit reduction contribution certification system and the reporting requirements for certain types of block transfers will be simplified.

New guarantor strength report

A new “guarantor strength report” will need to be prepared by a professional adviser before certification or re-certification of Type A contingent assets (group company guarantees) that are expected to result in a levy reduction of £100,000 or more. This is predicted to affect one in five guarantees.  

The report will need to demonstrate that the guarantor could meet the guarantee in the event of insolvency of the employer.  Advisers preparing these reports must accept a duty of care to the PPF. There was initially some concern about the potentially wide-ranging nature of this duty, so the PPF has now clarified its scope: it relates to the levy saving as a result of the contingent asset in the relevant levy year (not any loss due to non-receipt of the sum guaranteed) and may be limited to a six year period.  Draft guidance on the guarantor strength report (due to be finalised in mid-January) is here.

New contingent asset standard forms

Changes will be made to contingent asset documentation, with new standard forms due to be published in mid-January.  The new forms will need to be used for new contingent assets entered into after publication. The key amendments the PPF expects to make include: 

  • wording to confirm that any fixed cap on the guarantor’s liability is unaffected by any claim, whether under the guarantee or otherwise, prior to insolvency
  • an optional clause for agreements with a fixed post-insolvency cap to limit pre-insolvency liability, though with a requirement that the pre-insolvency limit be substantial, and
  • revised wording on amendment and replacement requirements.

DB schemes should now start planning their PPF levy reduction measures....It is important to factor in the new requirement to obtain a guarantor strength report in respect of Type A guarantees where the expected levy saving is £100,000 or more. If relevant, covenant advisers should be engaged as soon as possible.

Position of existing contingent assets

Some existing Type A (group company guarantee) and Type B (security over cash, real estate or securities) contingent assets will need to be re-executed on a new standard form before the next (2019/20) levy year and not by the end of March 2018, as had originally been proposed. The PPF has now clarified that this requirement applies only to those Type A and B agreements which include a fixed cap on the amount guaranteed (i.e. not those limited only by reference to section 179 or section 75 liabilities).  This should reduce significantly the number of contingent assets requiring re-execution.

New information sources and special category employers

In addition to collecting data from Companies House and the Charity Commission, Experian will now use data from the Higher Education Funding Council of England and the Financial Conduct Authority, among others.

There will be a new rule for “special category employers”, a small group of entities which,  in the PPF’s view, do not currently score appropriately and which are judged to be very low risk – all will have “close links to government”.  Employers who believe they could come within this special category rule can apply using a self-certification form

Deadlines and next steps

DB schemes should now start planning their PPF levy reduction measures. The deadlines for providing information to the PPF have been published and can be viewed at the end of its policy statement.  Note that the key deadline for the provision of much information is Saturday, 31 March 2018, which is during the Easter weekend.

It is important to factor in the new requirement to obtain a guarantor strength report in respect of Type A guarantees where the expected levy saving is £100,000 or more.  If relevant, covenant advisers should be engaged as soon as possible.  The PPF will not generally accept reports late (and will only do so where, among other things, there were reasonable grounds to assume a report would not be necessary), so trustees may wish to “err on the side of caution” when deciding whether one is required. 

The PPF encourages any entity that believes it comes within scope of the new “special category employer” rule to apply well ahead of the 31 March 2018 deadline, to give an opportunity to address any issues with the application before the deadline.

Of somewhat less immediate concern is that Type A and B contingent assets with a fixed cap will need to be re-executed (most likely by the end of March 2019) in order for this to continue to be recognised for levy purposes.  However, the advance planning required should not be underestimated.

For more information please contact Sarah Franklin or Hugh Gittins.

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