The Pension Protection Fund (PPF) has amended proposals to its levy which include an extension to the deadline for scheme valuations and revising parts of the risk-based calculation.
In December, the PPF set out firm proposals for calculating the levy, including the recognition of contingent assets, but a five-week consultation has now led to some amendments around how the risk based part of the levy for 2006/07 will be calculated.
The final proposals have made revisions to the documentation for contingent assets and have also relaxed the requirement for a section 179 actuarial valuation to be submitted within one year of its effective date.
For the section 179 valuation, if trustees miss the one year deadline but still submit the results by 31 March 2006 and comply fully with all the relevant regulations and guidance in all other respects, the PPF will include the results in the calculation of the risk-based levy, which they hope will increase the number of valuations submitted by the end of March.
After receiving over 70 responses to the second consultation, which ended on the 23 January, the PPF have also released the final Board Determination which sets out how the levy will work, including revised aspects of the risk-based levy calculation.
In December, it said it would calculate the risk of UK branches of foreign registered companies by using the average failure score of UK employers sponsoring defined benefit (DB) schemes within the relevant industry.
But following the consultation, the PPF decided if an employer is a branch of a foreign registered company, the Board will use the Dun & Bradstreet (D&B) score of the foreign company to calculate the employer’s insolvency risk.
In the previous proposals, the PPF said the current policy of D&B to cap the failure score of a business with a negative net worth will be ignored within the 2006/07 calculation.
As a result of the consultation, the PPF is ignoring another of D&B’s policies, where they apply a parental severe risk override to businesses which are subsidiaries of a parent company with a high risk of insolvency.
The PPF says although it is important to consider the strength of the group within which a particular company operates, the rule in its current form is “not appropriate for calculating insolvency risk as part of the levy calculation”, and therefore will be ignoring it for the 2006/07 risk-based levy.
On the role of contingent assets in calculating the levy, the PPF proposals remain unchanged from December in the recognition of Type A assets, which are direct company guarantees, Type B assets, which are guarantees from sponsoring employers over cash, securities or real estate and Type C assets, which include letters of credit and bank guarantees from third parties.
But following detailed comments from the consultation, the PPF has made some revisions to the contingent assets documentation, which now allows the value of the asset to be reduced and/or different assets to be substituted subject to rules.
It has also expanded the guidance in relation to the use of the forms, and added standard documentation relating to security over land in Scotland and Northern Ireland.
But the PPF did not agree with some of the responses, including concerns over the Board’s requirement suggesting contingent assets must remain in place for the long term, as this does not fit in with the idea of an annual levy assessment.
That said, the PPF argues pension liabilities are also long-term in nature and its aim is to value contingent assets in line with the real risk reduction they offer. The Board also stands by its decision not to include credit default swaps (CDS) within the risk-based levy.
It says it will not recognise CDS until standardised documentation and procedures can be developed to reflect the specific and more complex mechanics of their operation.
But the PPF says it has received many “helpful responses” which have suggested ways to adapt documentation to allow recognition of CDS without increasing administration for the PPF and extra costs to the levy payers.
The Board says it plans to work closely with stakeholders to develop proposals during 2006 with the aim of including CDS in the risk-based calculation in future years.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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