Issue 19 - September 2007
The Pension Protection Fund consults on its plans for the risk-based levy

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The usually lazy days of August saw the publication of two major consultations.The first to come out (on employer debt) is considered below; the second was on the future development of the Pension Protection Fund (PPF) levy from 2008/9 onwards. This consultation comes as the first phase of the PPF levy is coming to an end.All schemes (except new ones set up since 6 April 2007) will be required to provide a section 179 valuation for the calculation of risk-based levies by 31 March 2008 and so there will no longer be a possibility of relying on a converted MFR valuation for future levy years.

One of the key proposals in the short term is that the data on which each year’s levy is calculated should be assessed a whole year in advance of the start of the levy year.This aim is to provide better advance notice to schemes of their levy for any particular year.The PPF’s proposal is that the new rules would apply for the 2009/10 levy onwards, with the levy for that year being calculated on the basis of underfunding and insolvency risk as at 31 March 2008.This would mean that schemes would know by November 2008 exactly how much their 2009/10 levy would be.The downside is that any measures to reduce the levy (such as deficit reduction contributions or contingent assets) would have to be rushed into place by March 2008 – otherwise, the earliest any measure could be taken into account would be for the 2010/11 levy year.

The PPF has also confirmed that the levy estimate (the amount it aims to raise each year from the levy) will be kept at a stable figure, this year’s figure of £675 million rising in line with an earnings index.As schemes become better funded, the PPF proposes to shift the cut-off points at which schemes in surplus face reduced (or no) risk-based levy. This is likely to mean that better funded schemes will face higher levies in future.

Separately, Dun and Bradstreet (D&B), the firm that provides the insolvency probabilities used in the levy calculation, have made some significant changes to their methodology which will have effect from the 2008/9 levy year. Many companies can expect to see their failure score fall significantly. However, the associated insolvency probabilities have also been revised so that the same insolvency probability is likely to be associated with a much lower failure score. For example, a failure score of 60 now corresponds to an insolvency probability of 0.0065 (which was previously the insolvency probability for a failure score of 87). These changes make itvery important that companies check thei failure score and in particular see whether there has been any change to the associated insolvency probability . One welcome change is that D&B has changed the way it rates not-for-profit organisations and so, from 2008/9, such organisations should see a substantial reduction in their levy.

D&B’s contract will be up for review in 2010/11 and the PPF is considering moving to a measure of longer term risk. It is also considering whether it might be appropriate to appoint more than one insolvency risk provider.

In addition, the PPF is consulting on the longer term shape of the levy and whether the levy model should be adjusted to take account of catastrophic events.Whilst smaller schemes are much likelier to enter the PPF than larger ones, the risk presented by catastrophic events is concentrated in the larger schemes. The PPF is therefore proposing a more complex formula for the risk-based levy to take account of the catastrophe risk. The likely outcome of such a change would be to increase the levy for larger schemes.

The Pensions Regulator publishes draft guidance on clearance

On 10 September 2007, the Pensions Regulator (TPR) published revised guidance on the process by which employers can seek clearance fromTPR in advance of any transaction (to ensure that they do not subsequently find themselves on the receiving end of a contribution notice or financial support direction). Whilst the text of the guidance has been considerably revised, the revisions are not particularly substantial, but reflect the changes in practice that we have seen since the guidance was first published in March 2005.The new guidance is much more focused on the principles for assessing the effect of any transaction on the employer covenant rather than on the prescriptive rules for doing so that were found in the first version.

The guidance also contains a reminder that, where there is a significant weakening of the employer covenant, the fact that a scheme is relatively well-funded may not be sufficient justification for employers to avoid clearance. In other cases, TPR will only expect to see clearance applications where the scheme is not fully funded on the higher of the scheme’s technical provisions (under scheme funding), section 179 basis (for the risk-based levy) and FRS17/IAS19.

Department forWork and Pensions publishes draft regulations on employer debt

Most pensions consultants asked to name the most complex and worst drafted pieces of pensions legislation would put the existing employer debt regulations in the top five. In a welcome move, the Department forWork and Pensions (DWP) has published draft regulations amending the way in which a debt is calculated when an employer withdraws from a multi-employer scheme.

These amending regulations will fix a number of problems with the existing regulations. For example, the existing regulations allow employers to quit the scheme without paying the full debt on a buy-out basis (the ‘section 75 debt’) so long as they put an ‘ApprovedWithdrawal Arrangement’ in place whereby another company guarantees the remaining debt. However, at
present, the Regulator has to be satisfied that the debt is ‘more likely’ to be paid under the ApprovedWithdrawal Arrangement before such an arrangement can be put in place. In practice, this has restricted the number of such arrangements.The new regulations will remove this ‘more likely’ test.

Also, at present, section 75 debt is often triggered when an employer ceases to have active members in the scheme. The new regulations will allow a one year period for new employees of that employer to join the scheme, thereby preventing some employers being inadvertently caught by a section 75 debt on the departure of their last active member.

However, the draft regulations also introduce some potential pitfalls for employers leaving multi-employer schemes. Under the old regulations, it was possible for all employers to leave a multiemployer scheme simultaneously without triggering the debt. The DWP is concerned that this could be used as a way of employers abandoning their obligation to the scheme.The new regulations will close this apparent loophole, but the way this has been done may have unforeseen consequences.As currently worded, where all the employers in a multi-employer scheme cease to provide future accrual in the scheme at the same time, a debt would be triggered on all employers. Lawyers have leapt in to criticise this proposal, and we hope that the DWP will remove this effect in the final version of the regulations. However, some lawyers have suggested that multi-employer schemes already thinking of closing their scheme to future accrual might want to consider accelerating the closure before these regulations come into force (expected to be in December 2007) in case the DWP do not change their mind on this provision.

The second criticism that could be levelled against these regulations is that they make an already complex area of legislation even more convoluted. There may be fifty ways to leave your lover, but it seems there will now be almost as many ways for an employer to exit their pension scheme. For further details of the alternatives, please contact jenny.gallagher@puntersouthall.com for the briefing note on the regulations prepared by our transaction division, Punter Southall Transaction Services.

Other recent developments
FinancialAssistance Scheme (FAS):
The DWP has taken a number of steps recently towards implementing the changes to the FAS introduced by the Pensions Act 2007. First, draft regulations have been issued which would provide 80% of core pension to all affected members and increase the cap on overall
pension from £12,000 to £26,000. Second, regulations have been laid preventing trustees of FAS schemes from purchasing annuities pending the outcome of the Young Review. Finally, the Young Review has announced that it would like to hear from any members of underfunded pension schemes that wound up between January 1997 and April 2005 with a solvent employer, as part of their investigation into whether the FAS should be extended to some categories of schemes with solvent employers.

Deregulatory Review:
he report of the Deregulatory Review was laid before ministers at the end of July and made a number of relatively small scale recommendations.These include some of the proposals contained in the employer debt regulations (see above) as well as a suggestion that employers should be able to agree with trustees to recover a surplus from the scheme once it is fully funded on its scheme specific basis.The reviewers could not agree on whether the mandatory requirement to increase pensions in payment should be removed. Please ask jenny.gallagher@puntersouthall.com if you would like a copy of our briefing note on the deregulatory review.

Developments on IAS19:
The International Accounting Standards Board (IASB) has issued a clarification on its Interpretation 14. There have been concerns that this interpretation would require employers with schemes with a more cautious agreed funding basis to the IAS19 basis to disclose figures on the higher basis in their accounts. The IASB say that whether and how IFRIC 14 applies to a particular entity will depend on the exact terms of the pension plan. However, the clarification essentially only restates the position set out in Interpretation 14, and it is therefore not clear whether it provides sufficient reassurance.

Punter Southall London Conference:
Punter Southall will hold its first London Conference (on the topic ‘Delivering SuccessfulWorkplace Pensions’ with Chris Hitchen, Chair of the NAPF, as keynote speaker) on 15 October. For further details, please click here.

For further information please contact your usual Punter Southall contact.

© 2007 Punter Southall Group Ltd. All rights reserved. This bulletin is intended to provide a brief summary of current issues and action should not be taken as a result of this bulletin alone.