Member Article

Pensions analysis: The Pension Protection Fund (PPF) has issued its levy rules and associated guidance and appendices for the 2022–23 levy year. Partner Suzanne Burrell examines the latest rules and guidance, the changes made since last year, the implications for pension schemes and what happens next.

What is the background to the PPF’s consultation on the 2022/23 levy rules?

The PPF’s consultation took place during autumn 2021 and perhaps unsurprisingly, the PPF has acknowledged that the impacts of coronavirus (COVID-19) have continued to be at the forefront of the PPF’s thinking. In the 2021/22 levy year, the PPF said that it would for now move away from setting the rules on a multi-year basis, enabling it to be more reactive to economic changes. In its consultation, the PPF recognised the need to balance the risk of higher claims, as the economic impact of the pandemic unfolds, against the strong funding position of the PPF.

The PPF has therefore proposed leaving the key levy parameters, such as the headline levy scaling factor, unchanged. The 2022/23 levy estimate is £390m which represents a £130m reduction on last year’s levy.

What was the outcome and were any changes made?

Measures introduced in 2021/22 to support schemes and employers through the pandemic are to be continued. This includes continuation of the coronavirus payment easement enabling schemes to request an extension to payment terms with interest payments waived for up to 90 days.

The PPF expects to see a fall in the risk-based levy for 80% of schemes. Additionally, the PPF has introduced a cap on increases to the risk-based levy at 25%. This cap will only apply for the 2022/23 levy year. The small schemes adjustment to the risk-based levy will continue to apply to schemes under £50m by asset size.

The principal changes introduced relate to schemes described by the PPF as ‘Alternative Covenant Schemes’. For schemes falling within this category, a separate calculation methodology is applied and the default position for these schemes is that contingent assets and asset backed contribution arrangements are not recognised by the PPF.

An alternative covenant scheme (ACS) is defined in the levy rules as a scheme which has been confirmed by the PPF as an ACS due to the features it possesses or the risk it poses to the PPF and the Board has confirmed that the scheme is either:

• a consolidator scheme
• a scheme where one of its purposes is to enable a return to be paid other than to members
• it has entered into an ‘Ongoing Governance Arrangement’ or that it has been agreed by the Pensions Regulator that such an arrangement will be entered into at a future date
• it is a scheme where the sole or last man standing Scheme Employer was responsible for all the scheme’s liabilities, but that Employer has been replaced by another employer, and:
  • the replacement took place on or after 1 January 2017
  • the replacement Employer has no material resource of its own to meet the Scheme liabilities, and
  • the only additional source of funding held outside the Scheme is of a limited capital value and those assets are only available when pre-agreed funding triggers are reached
• it is a scheme where the majority of scheme liabilities have accrued with an employer that does not participate in the scheme and has no obligations to meet those liabilities (or where the PPF thinks that the obligation cannot be met or is unlikely to be met)

Concern was raised during the consultation that the new rules on ACSs would result in schemes which had been the subject of a corporate reorganisation or scheme merger falling within this new designation. The PPF’s expectation is that the ACS Appendix will be more appropriate for schemes which no longer rely on the covenant of a trading business and instead are supported by assets (whether held inside or outside the scheme).

The PPF has published accompanying guidance setting out how it will exercise certain discretions to it and the information it will require to enable it to calculate the risk-based levy for ACSs. This guidance gives examples of circumstances where the PPF considers the ACS Appendix and includes the following:

• a business as usual transaction such as a scheme merger
• transactions where the scheme covenant is provided by a PPF-compliant guarantee and is not for a limited sum
• schemes that have liabilities that did not originally accrue with the sponsoring employers eg through scheme mergers and corporate transactions. The PPF says that provided that the scheme has an employer which is liable for those liabilities and that employer’s covenant is derived from a trading entity, then the it would not expect the ACS Appendix to apply
• transfers to a defined benefit master-trust
• normal course of business fee arrangements under investment contracts

What are the implications for pension schemes?

For most schemes the position is largely the same for this levy year and it seems that many schemes will see a fall in their risk-based levy. Steps for recognition of a new contingent asset or recertification of an existing contingent asset are largely unchanged from last year. Similarly, steps for certification of deficit repair contributions are also unchanged.

Any scheme wishing to put in place new contingent assets or to recertify existing contingent assets must do so by 31 March 2022 with all supporting documents emailed to the PPF by 1 April 2022. Where trustees wish to certify the value of an asset backed contribution arrangement and any payments made under the arrangement, the same deadline applies.

Additionally, trustees and employers should consider whether any activity which reorganises the scheme liabilities could result in the Scheme falling within the PPF’s ACS Appendix

What happens next?

Trustees should check that any steps required are in hand, particularly if they need to commission an updated valuation in respect of a type B(ii) contingent asset (charge over real estate) or where they need to assess a guarantor’s ability to meet the guaranteed obligations in respect of a type A contingent asset (guarantee).

This analysis was first published on Lexis®PSL on 7 January 2022.