Save money on your PPF levy

Updated July 2011

The Pension Protection Fund (PPF) collects annual levies from defined benefit (DB) pension schemes. There are two levies: the scheme-based levy, based on the number of scheme members and the risk-based levy, based on a scheme’s underfunding and the risk that its sponsoring employer may become insolvent. Trustees should start work now, with the employer, to consider how they can reduce the PPF risk-based levy for 2012/13.

How is the risk-based levy calculated?

The risk-based levy accounts for 80% of the PPF levy. The PPF uses Dun & Bradstreet to assign a failure score to the employer. This is based on the likelihood of the sponsoring employer becoming insolvent, stopping trading and being unable to pay all of its creditors within the next 12 months.

Contingent assets

One way that schemes can make savings on their PPF risk-based levy is by entering into a contingent asset, using the PPF recognised agreements. These include:

• A parental guarantee from a parent company within the same group as the participating employer in a DB scheme
• A charge over cash, real estate or shares in favour of the scheme trustees
• A letter of credit and bank guarantees

Company issues

Financial Directors are keen on PPF contingent assets as they reduce expenditure on the PPF levy, either directly as a scheme expense or indirectly through employer contributions. However, the PPF agreements are tightly drafted in favour of the trustees, which leave little manoeuvre for the company. The PPF requires the contingent assets to be re-certified each year.

If entering into a contingent asset, the employer should consider:

• whether they have an asset that can be charged for an indefinite period of time
• does the proposed contingent asset breach any covenants, negative pledges to the bank or restrictions under its borrowing arrangements
• the resulting reduced borrowing capacity

If the company prefers a contingent asset rather than an injection of cash, a business case should be presented to the trustees, with the company’s rationale. For example, although a cash contribution would improve the scheme’s funding position and there would be tax relief on the contribution, there would be a cash flow impact on the company and lack of control once the cash has been paid across to the scheme.

Trustee issues

A contingent asset is not only a way to reduce the scheme’s risk based levy for companies but also to give the trustees some security.

• If the company were to fail, a charge over property makes the trustees a secured creditor , rather than an unsecured creditor, so they would be higher up the list of creditors
• Trustees are more likely to consider investing in a greater percentage of equities or a longer recovery plan if they have a PPF contingent asset
• The company demonstrates its long term commitment to the pension scheme, which reassures trustees.

Actions

• Contingent assets have to be registered with the PPF by 5pm on 31 March 2012, to be taken into account for the 2012/13 risk-based levy.
• Employers and trustees should start a discussion now with the employer and parent company/other group companies to decide on the most appropriate contingent asset to use.
• Liaise with the actuary to quantify which is the most cost effective contingent asset for your scheme and for the company.
• Check with the company's FD to ensure that there are no negative pledges to the bank which could block the use of a contingent asset.
• Seek advice from your lawyer about the documentation required and whether an overseas lawyer should also be instructed (required if the parent company is not a UK company).
• If you are considering using a contingent asset for 2012/2013, start the process now.

This publication is based on an article that originally appeared on SchemeXpert.com, an online service provided by the Financial Times. It is intended for general guidance and represents our understanding of the relevant law and practice as at July 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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