Winner or loser? How DB funds should approach the new levy scorecard

The new levy scorecard method changes the way the risk of sponsor insolvency is assessed and how the levy is calculated.

The first step defined benefit trustees and sponsoring employers should take is to ensure they are aware of the key differences between this and the previous method, in order to be able to work to mitigate the impact the changes may have on their schemes.

The key changes for schemes to be aware of are as follows: 

• A greater focus on financial indicators when determining the risk of insolvency, where previous consideration had been given to non-financial indicators, such as the age of company directors. 

• A clampdown on so called ‘scorecard arbitrage’. Previously, some companies filing consolidated accounts had been scored on the “large and complex” scorecard, but the criteria used to allocate each employer to one of the scorecard approaches has now been tightened. 

• ‘Immaterial’ mortgage charges will no longer be included when assessing the credit score of the sponsor, provided these have been appropriately certified. 

• Missing data for non-UK companies is likely to worsen scores significantly for those entities. 

• The levy-saving from having a guarantee from another group company may be reduced, as the PPF will consider the potential effect this could have on the guarantor. 

• Public credit ratings will no longer override any sponsor’s PPF insolvency score. 

• The 10 per cent discount given to ‘last man standing’ schemes will be reduced, with the reduction reflecting the spread of membership between different employers. 

• Any asset underlying an asset-backed contribution vehicle will be recognised, provided it fulfils the valuation conditions. 

• Group companies providing a guarantee will no longer have their insolvency score adjusted if they are the ultimate global parent in the group and if they file consolidated accounts. 

The scores assessed by Experian will be more difficult for scheme sponsors to challenge than the D&B ratings were.

What should trustees do? 

First and foremost, trustees should ensure all information is up to date and appropriately certified on exchange in advance of the March 31 2015 deadline and, where overseas entities are responsible for a scheme, any missing data is collated and submitted to ensure scores are not negatively impacted.

For LMS schemes another deadline will be crucial, as they will need to have legal advice by May 29 2015 to support their status.

The Pensions Regulator will be writing to these schemes in 2015-16 to seek confirmation of this.  

Trustees also need to ensure information regarding the distribution of scheme members among employers is up to date and accurately recorded on exchange. 

Where applicable for their schemes, trustees and sponsors will need to provide evidence to Experian that ‘immaterial’ mortgages are eligible for removal from the model and the valuation of any asset-backed contribution or contingent asset satisfies the valuation requirements, so they can be taken into account when calculating the levy. 

Trustees and sponsors should look to calculate the expected impact of the changes to the scorecard methodology on their 2015-16 levy as soon as possible. 

The changes will lead to a significant redistribution of employers across the rating bands and therefore some schemes will see an increase in their levies, while others’ levy payments will reduce.  

The PPF anticipates 50 per cent more schemes will see a reduction than those for whom the levy will increase – the increases are therefore expected to be far more significant than the reductions.

It is important, therefore, that trustees of schemes who are anticipating an increase in their levy engage with their sponsors early to ensure this is flagged and any mitigation options are explored – such as certifying deficit reduction contributions or considering contingent assets or guarantees.

Alan Collins is head of trustee advisory services at Spence & Partners