A PPF levy for schemes without a substantive sponsor

The consultation closed earlier this month, and we look forward to responding by the end of March.

The proposed new rule aims to charge an appropriate levy for schemes that no longer have a substantive sponsoring employer following a restructure.

Under the current system, the expectation is that when schemes separate from their sponsor, they must either buy out or enter the PPF.

Proposals for schemes to run on without a substantive sponsor seek to sidestep that framework. In so doing, they would create a new and ongoing risk to PPF levy payers.

Avoiding cross-subsidy

A key principle of the PPF levy is that it is as reflective of risk as possible. Schemes without a substantive sponsor present a different risk to the PPF from that posed by other schemes.

Our consultation therefore looked at developing a new approach to charging such a scheme an appropriate levy, not least to ensure there is no inbuilt cross-subsidy from existing levy payers.

The new proposed charging methodology is based on a commonly used pricing model for valuing put options, which has then been adapted to the PPF’s particular circumstances. 

The methodology also recognises that a scheme with no sponsor will always pose a bigger risk than an identical scheme which has a sponsor, however weak. It should, therefore, always pay at least the same levy.

The key point to note here is an ‘identical scheme’. Our view is that only schemes that are well funded are likely to be able to operate on a self-sufficient basis. The levy they pay will reflect that and may not be large in absolute terms, even though it is higher than an identical conventionally supported scheme would pay.  

Conversely, the levy calculated on the option pricing basis would be high for a less well funded scheme, reflecting the greater risk that it turns out not to be self-sufficient in the longer term.

Few schemes would be directly affected by this rule in its first year, but in launching the consultation we were keen to hear the views of stakeholders to inform the development of the framework.

We will set out our conclusions for 2017-18 shortly. In those conclusions we will flag that, regardless of whether we plan any extension in the scope of the rule for 2018-19, we will invite further input from stakeholders ahead of finalising the 2018-19 rules.

The final 2017-18 levy determination, incorporating the finalised rule for schemes with no substantive sponsor, will be published by March 31 2017.

David Taylor is executive director and general counsel at the Pension Protection Fund