UK: PPF Levy - Are You Paying More Than Your Fair Share?

Last Updated: 24 October 2014
Article by Elmer Doonan, Jay Doraisamy and Rebecca McKay

If you sponsor a defined benefit pension scheme, you will be well aware of the costs associated with funding the scheme and making sure all regulatory requirements are met. One of the costs (unless the scheme is not eligible for PPF protection) is the annual PPF levy. But is the PPF levy for your scheme fair? Does it reflect the true risk of the scheme ever becoming a burden to the PPF? The answer is often no, which means many schemes are paying too much for their PPF levy. We can help.

What's the problem?

Risk-based levy

The main issue lies with the risk-based element of the levy, which typically accounts for the bulk of any levy invoice. One of the key elements in calculating the risk-based levy is assessing the likelihood of an insolvency event occurring in relation to the employer. The PPF uses its agent, Dun & Bradstreet (D&B) (which will be replaced by Experian in 2015), to assess this likelihood. If D&B or Experian fails to take into account the appropriate data when calculating the likelihood of the employer's insolvency, this can lead to schemes being hit with an inflated risk-based levy.

The PPF has recently published its response to the consultation on the new PPF-specific system of risk scoring, which could significantly impact a scheme's risk-based levy. Under the new system, instead of being designated a "failure score", companies will be allocated a scorecard within a range of insolvency probabilities, which will then be used to create a series of 10 bands. A levy rate will be assigned to each band. The information used to determine the "band" for each employer is also changing. It is therefore critical that schemes and employers understand what information is relevant when bands are allocated and make sure it is available and accurate.

Contingent asset arrangements

In other cases, schemes are not aware of or have not taken advantage of putting in place a PPF-compliant contingent asset arrangement. If a scheme has the benefit of a parent company guarantee or a charge over property, or potentially has access to such security, this can often be used to reduce the PPF levy provided the security is structured in the correct way.

Dentons can offer a solution

For a fixed fee, we can help reduce your levy invoice because:

  • we understand the factors that count in order to produce an improved insolvency risk assessment and can advise on the appropriate information which should be provided to D&B and Experian;
  • we can advise on appeals to the PPF against D&B or Experian decisions and have a proven track record of improving the insolvency risk attributed to employers through such appeals;
  • we can advise on appeals to the PPF Ombudsman and court;
  • we can advise on putting in place PPF-compliant contingent assets arrangements by utilising either existing security arrangements or new security arrangements.

Each scheme and employer turns on its own particular facts and we can advise on the steps that can be taken to reduce the levy as appropriate. For example, schemes in the utilities industry often benefit from specific protections under legislation or in the scheme documentation. These protections can have a significant bearing on the factors to be taken into account when calculating the risk-based levy.

Saving you money

As the PPF levy is payable annually, getting your insolvency risk assessment right should reduce your levy bills in future years and deliver substantial cost savings to your business.

What is our experience?

We have a wide range of experience in dealing with and appealing PPF levy invoices and, in particular, the risk-based element of the levy. Our experience extends to specific industry knowledge of various sectors including the rail, electricity and water industries. We have successfully advised clients on ways to reduce their levy, which has led to the PPF producing revised and downgraded levy invoices. Our experience includes guiding clients through the D&B appeal process and advising on the risks of taking a case to the PPF Ombudsman and the court.

We have also advised on various contingent asset arrangements, which range from charges over property to parent company guarantees that have led to reduced PPF levies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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