How changes to the PPF levy could affect your scheme

The PPF this week released the result of the triennial consultation on levy calculations, announcing changes to the treatment of ABCs and mortgages, and put in more strict rules for guarantors.

It is going to affect some of the newer ABCs

Julia Dickson, PwC

The pensions lifeboat also announced transitional protection would not be put in place for employers that have seen a big jump in levy charges since Experian was appointed as insolvency risk provider.

David Taylor, director of strategy at the PPF, said the responses to the new model were largely positive, but the organisation itself and the Pensions Regulator had concerns about some of these assets and the value attributed to them.

According to the consultation response, the PPF will now consider all asset types, not just UK property, and trustees will be expected to provide a yearly valuation of the ABC if the company were to become insolvent.

“[ABCs] come in lots of different guises and some of them are more likely to be valuable to us if a company were to go bust,” Taylor said. The first valuations are expected on March 31 2015 for the levy year 2015-16.

“If the asset is property and is readily usable by someone else, that valuation won’t look that different from the accounting valuation,” he said. “But if the underlying asset is something that is more intangible, and something that is more tied up in the business of the company, then it may be harder to ascribe a higher value.”

The use of non-property contributions, such as brands, intercompany receivables or stock, has become more of a trend over the past 18 months, said Julia Dickson, partner in PwC’s pensions credit advisory team.

She said the announcement will give employers with non-property ABCs some benefit, but not the full benefit they previously may have had.

“It is going to affect some of the newer ABCs,” she said. “The impact is… they are unlikely to get the full value of the ABC that they previously could deduct but the good news is that they will still have some allowance for that, albeit on an insolvency basis.”

Passing muster

Trustees will be required to provide additional documentation to the PPF if they would like the contribution to be considered. Eoin Seager, senior manager at consultancy KPMG, said schemes will need to certify on an annual basis the value of those structures.

“There will be an initial requirement,” he said. “In a lot of cases the underlying work has probably been done anyway.”

However, he and Dickson warned that schemes should be looking at the cost of providing the yearly valuation compared with the reduction in the levy.

“There can be substantial savings to the levy as a result of this,” Seager said. “But ultimately the cost in terms of adviser fees and the hassle of putting in place guarantees and maintaining them can sometimes be more than it is worth in terms of the levy calculations.”

Further amendments include how the insolvency model takes into account mortgages. “The age of a company’s most recent mortgage we know, in the aggregate, is a very good predictor of insolvency, so it is definitely something that should feature in a model like this,” Taylor said.

However, there are some circumstances in which a new mortgage is not a sign that something is going wrong, and some inconsequential mortgages may be omitted from this process.

“Examples of those would be where a company has existing secured financing, but for a positive reason wanted to refinance on terms that are good or better,” said Taylor. “In those circumstances, the fact that they had to regrant their mortgage shouldn’t result in a reduction of their insolvency score,” he said.

Dickson said these changes will be welcome for schemes associated with group employers. “In [the previous] scenario you could find in a big group a really immaterial charge that would be causing a detriment to the insolvency score,” she said.