Member Article

Pensions analysis: The Pension Protection Fund (PPF) has issued its levy rules and associated guidance and appendices for the 2023–24 levy year. Suzanne Burrell, Partner at Shoosmiths, 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 2023/24 levy rules? 

The PPF’s consultation ran during the autumn of 2022. It took place following the PPF’s publication of its funding strategy review conclusions. That review concluded that the PPF was able to move to a significantly lower levy without risking its ability to pay member benefits.  

The consultation proposed that the 2023/4 levy would be halved to £200m. The consultation also proposed that the cap on increases to the levy introduced for the 2022/23 levy year would not be continued.  

The PPF has also observed that there has been no rising trend in DB sponsor insolvency notwithstanding the increase reported by the Insolvency Service. Additionally, the PPF’s 7800 Index shows that the scheme funding ratio improved from 104.2% to 118.2% between July 2021 and July 2022, and by November 2022 had increased again to 133.7%. Additionally, the PPF’s own reserves are close to what it expects to need to meet its Funding Resilience Test.   

The PPF consultation also highlighted that it considers that there is scope to change its methodology and move over time to a simpler methodology placing more weight on scheme underfunding and less on scheme insolvency risk. The 2023/4 consultation represents the first step in this change.

The PPF considers that there are two objectives in revising the methodology: flexibility and simplicity. Alongside the two key objectives they recognise various supplementary objectives underpinning this: compliance with legal objectives, avoid undue volatility, balance interests of different levy payers and members and align with behaviours expected by the Pensions Regulator (tPR).  

What was the outcome and were any changes made? 

In their final announcement on the 2023/24 levy rules, the PPF confirmed the reduction to £200m. The PPF expects that 98% of schemes will pay a lower levy than this year and the majority of schemes paying a risk-based levy can expect it to fall by more than half.  

The PPF also confirmed that it would go ahead with proposals to reduce increments between levy bands by half with a view to reducing the cliff edge between those bands and therefore volatility. Additionally, the risk-based levy scaling factor will be reduced by 23% and the scheme-based multiplied by 10%.  

The PPF’s proposals to reduce volatility in levies and to incorporate the new asset class information being collected by tPR will also go ahead. The consultation period took place following the recent market movements and volatility following the Government’s “Growth Plan” and subsequent intervention by the Bank of England in the bond market. Notwithstanding this, the PPF advised that those market movements would not impact funding strategy.

Concerns were raised that larger and stronger schemes would be paying a proportionately greater share of the levy bill. The PPF’s response was that they see this as “genuinely unlikely”. Their view is that levies will fall materially over time. Additionally, they are committed to the principle that schemes posing more risk pay more levy while also recognising that the levy should evolve to reflect concerns about volatility and complexity.  

What are the implications for pension schemes? 

For most schemes the position is largely the same for this levy year and it seems that most schemes will see their levy reduce. Steps for recognition of a new contingent asset or recertification of an existing contingent asset are largely unchanged from last year. Similarly, steps for submission of contingent assets, certification of deficit repair contributions, exempt transfer applications and full block transfers are also unchanged. 

There is a small change to the ley rules so that the PPF can take account of payments made to a scheme in exchange for a scheme trustee’s interest in an asset backed solution arrangement ceasing.  

Any scheme wishing to put in place new contingent assets or to recertify existing contingent assets must do so by 31 March 2023 with all supporting documents submitted to the PPF by 3 April 2023. Where trustees wish to certify the value of an asset backed contribution arrangement and any payments made under the arrangement, the same deadline applies. 

This levy year represents the beginning of a shift in the PPF’s methodology, their stated aim being simplification of the methodology. The PPF has signed posted that some developments may need legislative change, particularly if the PPF wanted to set a levy in any year to zero. It is also likely that there will be changes to the basis of calculation of the levy depending on scheme size and rebalancing the risk-based element to emphasise underfunding and focus less on insolvency risk.

In future, the PPF could implement changes in the rules for smaller schemes. The PPF recognises that as the levy falls, small schemes will represent a negligible risk to the to the PPF and so the cost of engaging smaller schemes with the levy system could become disproportionate.  

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).

The PPF will also be revising its contingent asset standard forms. The current versions reference the existing notifiable events regime and the PPF intends to issue revised standard forms in time to reflect the new provisions once they are in force. 

As the PPF begins its journey to revise the methodology, it has invited stakeholders to provide views on simplifications to the current methodology. 

Finally, the PPF acknowledged that stakeholders had a range of views on the use of potential excess PPF reserves in the future. This is a matter which will require government input and legislation.  Currently, the Pensions Act 2004 is silent on this issue.   

 

This analysis was first published on Lexis®PSL on 23 January 2023 and can be found here (subscription required).

 

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