Insolvency risk winners and losers as PPF proposes new levy approach
Around one in ten schemes will see their Pension Protection Fund (PPF) levy increase by at least £50,000 under proposals published by the PPF this week. The PPF’s consultation on the levy formula for years 2015/16 to 2017/18 proposes that many elements of the levy calculation remain unaltered, but changing insolvency risk provider from Dun & Bradstreet to Experian potentially has a huge effect (both gains and losses) on individual schemes’ levies.
Access to Experian’s new model is expected in the coming days via a web portal, which will allow trustees to monitor the sponsoring employer’s insolvency scores and perform “what if” analyses to assess the impact of certain variables changing. The information on the portal will allow schemes to gauge whether they are likely to see a large change in their PPF levy.
The consultation also highlights some current areas of uncertainty in the model, including:
- Whether to use credit ratings produced by ratings agencies for those companies that have them
- Whether to introduce transitional protections for schemes that see a large increase in insolvency risk; and
- The method for calculating the insolvency risk for not-for-profit organisations, including which entities fall under that definition and the data to be used in calculating their insolvency risk
Other proposals include:
- Toughening the conditions for certifying a Type A contingent asset (parent guarantees)
- Reducing the 10% insolvency risk discount available for associated last man standing schemes; and
- Only including the value of certified asset backed contributions where the underlying asset is UK property
Responses to the consultation are required by 9 July 2014.
A News Alert summarising the 190 pages of consultation will be issued to our Bulletin subscribers early next week.
Comment
Whilst it is “only” the insolvency risk that has changed for many schemes, that change is a crucial one that will potentially see individual schemes’ levies rise and fall dramatically. It will be important to monitor your scheme’s Experian insolvency rating when it is available – and it is also worth considering whether to respond to a consultation that appears to have a reasonable number of elements still “up for grabs”.
PPF valuations required for “material” redefined money purchase benefits
The Pension Protection Fund (PPF) is consulting on proposals to require schemes with benefits that were previously treated as “money purchase” to submit new or out of cycle PPF levy (Section 179) valuations by 31 March 2015.
The recent regulations redefining money purchase benefits (see Pensions Bulletin 2014/19) require schemes that were previously deemed to be entirely money purchase, but would now include a non-money purchase element, to submit their first Section 179 valuation by 31 March 2015.
They also gave the PPF power to decide when it would require Section 179 valuations from schemes that have elements of benefits which, in previous Section 179 valuations, have been treated as money purchase but under the new regulations would be considered to be non-money purchase.
The PPF is proposing that such schemes must supply a new Section 179 valuation by 31 March 2015 where the redefined money purchase element is “material”. For these purposes, “material” means that including the formerly money purchase benefits within the most recent Section 179 valuation would:
- Change the surplus or deficit by at least 10% in relative terms; and
- Change the surplus or deficit by at least £5 million in absolute terms
Section 179 valuations currently in progress can be amended to incorporate the new money purchase definition, and when submitted will satisfy the proposed requirement.
Responses to the consultation are required by 9 July 2014.
Comment
The PPF is trying to take a pragmatic approach but some schemes with a significant redefined money purchase element will have to produce an out of cycle valuation quickly under the current proposals. This could be expensive and administratively awkward, particularly as schemes will generally find it easiest to obtain benefit and asset data at a scheme year end (which may be near the deadline for submission).
Schemes facing an out of cycle valuation may wish to lobby for higher materiality limits or the ability to update a previous Section 179 valuation for the new money purchase definition (likely to be considerably cheaper than completing a brand new valuation).
Pension Protection Fund relocates
The Pension Protection Fund has announced that it has moved its head office – but still remains in Croydon. All telephone numbers and email addresses will remain unchanged – as will the contact details for assistance for members of schemes that have transferred to the PPF or are part of the Financial Assistance Scheme.
VAT treatment of pension costs - transitional provisions extended until the autumn
Uncertainty about the long-term VAT treatment of pension fund management costs will continue until the autumn following the publication by HM Revenue & Customs (HMRC) of a holding response in the shape of Revenue & Customs Brief 22/14. This states that definitive guidance on this whole area, in the form of an update to Public Notice 700/17, can now be expected in the autumn and that the optional six month transitional period in relation to the “70/30” treatment in specified circumstances, which started on 3 February 2014 is extended until then.
To recap, this follows HMRC’s announcement concerning developments in the European Court of Justice (CJEU) about the VAT treatment of pension scheme expenses (see Pensions Bulletin 2014/05). Since then the CJEU has given its ruling about the VAT treatment of expenses incurred by defined contribution pension schemes in the ATP case (see Pensions Bulletin 2014/11).
HMRC also provides a dedicated email address for trustees or sponsors who wish to register protective claims with them.
Comment
The unfortunate uncertainty created by HMRC in its February announcement is now set to continue until the autumn. Trustees should take tax advice on how the VAT treatment of their expenses may change and whether there is a possibility of retrospectively claiming VAT back and if so whether or not to register a claim with HMRC. This may not be without risk though – a higher, rather than lower tax bill could end up being incurred.
Are LLP members “workers”? Supreme Court rules
The Supreme Court has overturned the ruling of the Court of Appeal in the case of Clyde & Co LLP v Bates van Winkelhof and held that partners of a limited liability partnership may be treated as “workers” for certain employment law purposes.
In this case, an analysis of the definition of “worker” in the Employment Rights Act 1996 led to the conclusion that a partner (strictly speaking, an equity member of an LLP) could also be regarded as a worker. This was important in this case because the partner is claiming the “whistle blowing” protections enjoyed by workers in this lawsuit.
The significance of all this from a pensions standpoint is that there is a similar, although not identical, definition of worker in the auto-enrolment legislation (Pensions Act 2008) so it is possible that LLP partners may need to be auto-enrolled.
Comment
In practice, even if they are regarded as workers, partners in an LLP may not be eligible for auto-enrolment – for example their partnership drawings may not count as qualifying earnings for auto-enrolment purposes. However, we report on this so that partnership clients can consider whether to take legal advice on whether they could be required to auto-enrol their partners.
The Pensions Regulator’s plans for the next three years
The Pensions Regulator has published a new corporate plan for the next three years (see Pensions Bulletin 2013/22 for the previous one). The Corporate plan 2014-17 sets out the Regulator’s business plan for the forthcoming year and its strategic plan for the next three years.
The latest plan for the first time takes into account the Regulator’s new statutory objective to “minimise any adverse impact on the sustainable growth of an employer” when regulating the funding of defined benefit (DB) schemes and outlines its strategic approach to regulating DB and defined contribution (DC) schemes, and to the implementation of automatic enrolment (AE). It also details how it will maximise compliance with AE duties among the country’s medium, small and micro employers, investigate pension liberation activity and fulfil its extended remit of regulating the governance and administration of public service pension schemes.
The Regulator states that it intends to be more proactive across the range of its work and has adopted the following four corporate priorities to guide its strategy over the next three years:
- To promote good governance and administration of work-based pension schemes – with its new statutory objective reflected in an undertaking to encourage trustees of DB schemes to take an integrated approach to risk management rather than considering employer covenant, funding plans and investment strategy in isolation
- To promote security and good outcomes for members of work-based pensions – again, the Regulator specifically undertakes to encourage trustees and employer sponsors to work together closely in order to achieve its new statutory objective
- To promote employer compliance with their pension responsibilities
- To improve its organisational efficiency and effectiveness
Comment
This corporate plan is essentially an evolution of last year’s plan, extended to allow for the new statutory objective and developments in DC regulation. Reflecting these new responsibilities, the Regulator continues to grow with plans to employ an average of 583 full-time equivalent roles during 2014/15 (compared to the headcount of 536 as at March 2014 anticipated in the Corporate Plan 2013-16).
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
