PPF levy framework consultation

14 October 2011

Following our recent update here, we have prepared a fuller update document on the PPF levy framework consultation for defined benefit scheme trustees and advisers.

Update available as PDF download (click the icon or go to our Library).

Summary of new features:

One important feature of the new framework is that the funding level of individual schemes, both under current and stressed conditions, is being given proportionately more weighting in the calculation of the levy and the PPF introduction of investment risk stress testing in supporting this is most welcome.

The PPF is implementing a standardised approach for stress testing via the inputs already provided to the Exchange data system, though schemes with protected liabilities in excess of £1.5bn will be required to carry out their own bespoke calculations – this option will also be open to all schemes to adopt on a voluntary basis and any who have made signficant progress in asset-liability management and, in particular, LDI strategies should at least consider this.

The bespoke approach is reasonably straightforward to apply and sufficiently flexible to permit schemes with alternative investment strategies to integrate these with the help of their investment adviser / managers.

Other key considerations include the following:

  • The PPF is looking to fix the levy rules and parameters for three year periods from 2012. This should have the effect of stabilising individual levy payments as long as scheme-specific parameters (level of liabilities, funding level, investment risk and employer risk) do not significantly change;
  • The existing employer risk estimation system will be shrunk from 100 to 10 insolvency bands and levy rates will be drawn from the broad bands rather than from the individual score. It is worth noting that the transitions between bands are rather more abrupt than we are used to so this could lead to discontinuities in assessed levies – though a one year smoothing system has been introduced which will mitigate this for temporary shifts;
  • When certifying or recertifying group guarantees, trustees will be formally required to certify that the guarantor could be expected to meet their commitment if called upon to do so at that time. The scope of permissible guarantors has been widened somewhat to include some unassociated companies, but the levy calculation still works on the basis of credit substitution rather than capturing any doubled-up or “best-of” benefit from having multiple sources of underpinning.

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Author: Martin Veasey
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