The Pension Protection Fund (PPF) provides a valuable safety net to members of defined benefit pension schemes, protecting members’ benefits on employer insolvency. It is funded by a levy on those same schemes, and this is a significant cost for many schemes and sponsors.
The levy is largely based on the funding position of the scheme and the financial strength of the sponsoring employer, with those schemes that the PPF think pose the highest risk paying the highest levies. The PPF’s methodology is publicly available, and this allows us to see where we can take steps to reduce the levy.
Improving your Experian score
In many cases the assessed strength of the employer can be improved. The PPF’s assessment is based on a specially-designed credit score from Experian, which is designed to estimate the chance of employer insolvency during the next year. Because Experian must provide a score for every company sponsoring a UK pension scheme, they follow a simple calculation approach. Experian will:
1. Place the employer into one of eight ‘scorecards’ depending on the size and type of the business (e.g. large group with turnover greater than £50 million p.a.)
2. Extract 5-7 key metrics from the employer’s most recently filed accounts and mortgage listings.
3. Calculate a PPF score, where the scorecard used (from step 1) determines the weighting applied to each of the metrics.
This suggests a few steps an employer can take to potentially improve its PPF Experian score:
1. Check that Experian has placed the employer in the correct scorecard. An example here might be where Experian has failed to identify that an employer is a charity. The Experian score would then penalise the employer for failing to make a profit, when they should in fact be in the ‘not-for-profit’ scorecard where profit does not feed into the score.
2. Check that Experian has picked up the latest filed accounts. Clearly the results within those accounts are important and may not be better than the previous year’s, but Experian will penalise an employer’s PPF score if they think accounts are overdue.
3. Check the age of the most recent mortgage recorded by Experian. The PPF Experian score treats older mortgages more favourably than younger mortgages, so refinancing can sometimes harm your score if it results in a new mortgage charge. Experian have a certification process to allow employers to override the ‘young mortgage’ effect if the mortgage is immaterial or if it directly replaced an older mortgage.
Reducing the ‘risk’ the PPF associate with your scheme
Looking beyond Experian scores, other options to reduce a scheme’s PPF levy include:
1. Certifying deficit reduction contributions that have been paid into the scheme since the last valuation. This reduces the PPF deficit and hence the levy payable.
2. Carrying out bespoke investment stress testing (which overrides the PPF’s standard stress tests). This has the most potential
to reduce the PPF levy for schemes using liability driven or complex investment strategies where the PPF’s standard stress tests cannot fully reflect the strategy.
3. Putting in place a PPF-compliant guarantee from a parent company. In this case the PPF will use the Experian score of the parent instead of the scheme’s sponsoring employer, potentially reducing the PPF levy if the parent is deemed to be stronger. Such a guarantee places a legal obligation on the parent and care is needed around how this interacts with other creditors.
If you are thinking of taking any of the steps above, we can estimate the likely impact on your levy beforehand. Please get in touch with your usual Quantum contact if you would like to discuss your options.
Case study
One of our clients was facing a PPF levy of over £1 million, and asked us if we could help. We were able to reduce the levy by 10% through a combination of certifying deficit contributions (saving about £20,000) and carrying out a bespoke investment stress test (saving another £90,000). The levy reduction achieved through bespoke stress testing can also be replicated in future years for further savings.
Simon Hubbard
simon.hubbard@quantumadvisory.co.uk