Who are the winners and losers?
2018/19: The new PPF levy triennium
30 Aug 2017 - Estimated reading time: 5 minutes
In September the PPF is expected to issue draft rules for how PPF levies will be assessed for the next 3 years. Some significant alterations to the regime are expected, with the most material changes being made to the Experian scores which are used to measure sponsor insolvency risk. Our 60 second summary provides further details.
The new “proposed” Experian scores have been available for a few months and the majority of sponsors have moved down the Experian band scale. To counteract this impact, the levy scaling factor will very likely be reduced. Broadly speaking, we expect that for bands 1 - 3, a fall in 2 bands means no change in levy and for bands 4-9 a fall in one band means broadly no change in levy.
Who are the winners and losers?
Whilst there are no hard and fast rules, based on our analysis, these are some of the winners and losers.
- Over 80% of sponsors will see no change (or a reduction) in insolvency risk from the new Experian scores so the majority will benefit from an insolvency risk point of view.
- Within this group, not for profit sponsors and charities benefit since in many cases they have stayed in the same levy band or improved to band 1. These sponsors will see a levy reduction. There are also a small number of very strong sponsors whose risk cannot be assessed solely by reference to their accounts who will be moved to band 1.
- Several sponsors currently in band 1 or 2 will fall to band 5 or lower. The PPF’s own analysis indicates that the aggregate increase in levy for these sponsors is c£80m. Our analysis indicates that many of these are likely to be high turnover, low margin well established household names. It was always the case that more sponsors than had originally been intended ended up in band 1 so some redistribution was likely. These sponsors could see their risk based levies increase by more than 50%.
- Sponsors with Type A guarantees are likely to see an increase in the costs associated with obtaining recognition for them. The PPF have indicated that they intend to change legal templates this year and that in order to obtain recognition going forward all existing agreements will need to be amended to capture the new terms. In addition, expert covenant reports will need to be obtained for the largest guarantees.
So what can you do?
Sponsors and Trustees should as a first step investigate what the changes mean for their scheme. It is increasingly becoming the case that Experian scores will be difficult to improve within short timescales (as they are based almost exclusively on published financial information) so increased focus should be made to ensure all the levy mitigation options such as submitting an out-of-cycle PPF valuation or a bespoke investment stress have been fully explored on an annual basis.
Your usual Hymans Robertson contact would be happy to discuss this further with you.
Note: This article is based on the PPF consultation published in March 2017. It is possible material changes could be made when the draft determination is published in the autumn.