PPF’s pre-COVID strength allows reduced
levies for 2021/22
What you need to know
- On 29 September 2020 the Board of the Pension Protection Fund (PPF) published its consultation on the rules for the 2021/22 levy (to be invoiced in the autumn of 2021).
- Despite the potential increase in risk due to COVID-19, the PPF’s strong funding position and hedging has meant that there are no plans to increase the amount of levy to be collected for the 2021/22 levy year.
- To the contrary, the PPF is proposing two key changes that could significantly reduce levies for some schemes, with the total 2021/22 levy estimate £100m lower than that targeted for the 2020/21 levy year.
- The risk-based levy for schemes with less than £20m in PPF liabilities will be halved. There will be a tapered reduction from 50% to 0% for schemes with PPF liabilities between £20m and £50m.
- The risk-based levy cap is being reduced from 0.5% to 0.25% of PPF liabilities.
- According to the PPF’s impact analysis, around 90% of schemes can expect to pay a lower levy for the 2021/22levy year. But the PPF warns of the potential for higher levies in future years.
- The PPF has broken with tradition by not setting levy rules for the next three years. The PPF will consider rule changes on an annual basis for the time being.
Actions you can takeAlong with being aware of the changes, it will be important to reflect changes in decisions being made now:
- Understand what the proposed rule changes could mean for your scheme’s levy. Ask for an estimate of your 2021/22 levy to help you plan ahead.
- Assess the impact of these changes on other levy mitigation measures. The changes may reduce or remove the savings from some typical levy saving actions.
- Consider how and when the impact of COVID-19 could be reflected in your levy. Consider actions that could help limit that impact.
Proposed deadlines for the 2021/22 levy
The finer detail: Key items covered in the PPF’s 2021/22 levy consultation
Impact of COVID-19 on the PPF
The pandemic is expected to lead to significantly higher claims on the PPF. However, its strong funding position and hedging of risks allows the PPF to avoid short-term changes to increase the 2021/22 levy giving schemes and employers one year’s grace from any impact of COVID-19.
Impact of COVID-19 on levies
Despite the current impact on schemes and employers, the PPF does not expect COVID-19 to have a significant impact on an individual scheme’s 2021/22 levies.
• Funding is smoothed over five years so the impact of short-term market conditions is limited.
• D&B scores will only allow for the impact of COVID-19 once accounts covering the impact of the pandemic have been filed. 2021/22 levies will use insolvency scores up to 31 March 2021 so the PPF expects the impact of COVID-19 to be relatively small and to have more impact on 2022/23 levies.
The PPF acknowledges that the impact of COVID-19 could lead to a significant increase
in the 2022/23 levy for some schemes.
2021/22 levy estimate of £520m
The £100m reduction compared with the 2020/21 total levy estimate arises from the latest update to the PPF’s prescribed valuation assumptions, a deterioration in insolvency risk and lower gilt yields, the proposed changes to the cap and the small scheme adjustment.
The PPF’s impact analysis suggests that 89% of schemes paying a risk-based levy could see a reduction relative to their 2020/21 levy. For small schemes this percentage increases to 98% and falls to 79% for larger schemes.
D&B insolvency risk model
The PPF’s new insolvency risk model has performed well from April 2020 to June 2020 and the PPF is not proposing any changes at this time. The PPF is conscious that it will need to keep its model under review as the world moves on past lockdown.
Annual review of levy rules
A departure from its usual approach (from largely fixed levy rules for three years at a time) to consider wider rule changes on an annual basis will give the PPF flexibility to make changes as the impact of COVID-19 unfolds. Annual reviews will also better allow the PPF to reflect changes to the asset information collected on Exchange as a result of proposed changes to the Pensions Regulator’s scheme funding regime.
Support to small schemes and SME employers
The changes proposed are aimed at helping small schemes who typically face the largest levies as a proportion of their PPF liabilities. The PPF believes these schemes’ risk to the PPF may be overstated under the current rules.
Reduction to the risk-based levy cap
Reducing the risk-based levy cap from 0.5% to 0.25% of PPF liabilities helps increase the number of schemes who benefit from the cap.
Other changes to come?
For the 2021/22 levy, the PPF proposes to recalibrate the mapping of public credit ratings to levy bands as at 31 December 2020. The PPF has commented that the stress factors as well as the asset class data and market indices used to roll-forward assets are to be reviewed next year for the 2022/23 levy.
For further information, please get in touch with Emily Sturgess or speak to your usual XPS contact.