The Pension Protection Fund will allow companies moving from a profit to a loss – due to the impact of guaranteed minimum pensions equalisation – to request an adjustment in their levy calculations.
In its 2020-21 levy policy statement, published on Monday, the pensions lifeboat stated that in cases where GMP equalisation costs move an employer from profit to loss, this could generate a move of up to two levy bands.
This is due to the fact that one of the criteria used to analyse a company’s insolvency risk for levy calculation purposes is profits, and such a change could result in the company receiving a worse rating.
Despite considering that such circumstances will probably only arise in a very small number of cases, the PPF noted that exceptions should be made.
For the small number of schemes involved this is good news and it is the right answer for them; it would be unfair for them to be penalised
John Cormell, Barnett Waddingham
It stated that the impact on individual scheme levies where this can occur – most likely to be pension funds sponsored by small and medium-sized enterprises – “could be significant”.
Companies can apply for GMP adjustment
The pensions lifeboat also noted that “there is a reasonable argument that a profit charge in one year for increased costs – which will be met over a number of years – does not affect insolvency risks substantially”.
In October 2018, the High Court ruled that Lloyds bank scheme trustees must equalise benefits between women and men who have GMPs because of contracted-out benefits.
The ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted-out benefits of their members.
Employers can request the PPF for an adjustment if three conditions apply. First, if a specific amount can be identified in accounts used to calculate one or more monthly scores – used to measure the company’s insolvency risk – that solely relates to a GMP equalisation adjustment.
Second, if allowing the adjustment would result in the company being viewed as reporting a pre-tax profit rather than a loss; and third, if allowing the adjustment would result in a change of the mean score to a levy band with a lower levy rate.
Emily Sturgess, head of PPF solutions at XPS Pensions, said: “Sponsors that are showing a loss in their accounts solely due to accounting for GMP equalisation should consider submitting information to the PPF to avoid paying an unnecessarily high levy.”
Experts applaud PPF decision
John Cormell, head of GMP equalisation at Barnett Waddingham, was surprised and pleased with the PPF announcement.
He said: “Most schemes will be unaffected, but for the small number of schemes involved this is good news and it is the right answer for them; it would be unfair for them to be penalised.”
Mark Williams, principal and London retirement practice leader at Buck, argued that “the PPF should be applauded” for taking a “pragmatic stance and avoiding unintended and expensive consequences for some employers, albeit a very small number”.
“Hopefully, other organisations, in particular HM Revenue & Customs, also adopt practical and outcome-led approaches to decision-making when it comes to GMP equalisation, thereby avoiding disproportionate costs arising,” he said.
In October, HMRC stated that it would publish its long-awaited guidance to address tax issues stemming from the equalisation of contracted-out benefits in December.
The issue is that schemes opting for GMP conversion could trigger an annual or lifetime allowance tax charge and a breach of allowance protections for the individual member.
Bauer case will not impact levy
The policy statement confirmed that the levy for 2020-21 will increase to £620m, a £45m hike when compared with the amount expected to be collected for 2019-20.
In the consultation published in September, the pensions lifeboat explained that it has seen the highest level of claims in its history in the past year, with uncertainties about global and UK markets adding to financial pressures.
The PPF also mentioned the potential repercussions of the Bauer case, a court case that relates to the German equivalent of the UK pensions lifeboat.
GMP compensation could cost members thousands in extra tax
Inadvertent action by an employer or pension scheme to compensate scheme members for inequalities in guaranteed minimum pensions could invalidate longstanding protection from onerous tax burdens.
Despite acknowledging that the judgment, due to be announced on December 19, could have a financial impact on the PPF, the lifeboat decided not to delay the levy policy statement publication in order to wait for the judgment.
“Even if there is an impact that makes a case for increasing the levy, there is very limited scope to do so for 2020-21,” the PPF stated.
In June, advocate general Gerard Hogan of the European Court of Justice stated that lifeboats should pay full benefits in the case of a defined benefit scheme sponsor going bust.
Mr Hogan argued that member states should provide full employees’ pension entitlements when following the EU Insolvency Directive. Under this rule, member states need to protect the interests of workers in the event of the insolvency of the employer.
