Guest opinion: Credit rating impacts on Pensions Protection Fund levy

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For those involved in pensions, this year will invariably mean preparation for the next raft of pensions legislation. While considerable focus has been given to the administrative burden facing sponsors, less comment has been made about the Pension Protection Fund (PPF) levy, which is required to finance the PPF and is determined based on scheme particulars but also the risk that the PPF is exposed to by the scheme in question. Like the Grand National, which also takes place in April, the levy is likely to become oversubscribed, until schemes apply for a waiver, or as a horse drops out due to form. But a large number will still join the start line.

One of the major factors in the calculation of the risk-based levy is going to be the Dunn and Bradstreet (D&B) rating. Early indication of form is no guarantee of performance, it all depends on the performance on the day: that being 31 March. Positions change as D&B update their failure scores daily. This is a relative position since 1% of companies have the same score. So not only can your score change as a result of your direct actions or interventions, but also if others change. While it can improve by outings or practice, its relative performance to others is also a factor. But in the meantime jockeying for position and training can help the outcome on the day. Certainly clearing any County Court judgements can be a quick and easy fix to improve the ratings. The worst position to be in is on the margins of one of the bands. Find yourself on the wrong side at the final hurdle and you will be eased out of the race, with large financial penalties as the consequence. This whole process requires stamina. It is a long race and is pitted with hurdles and obstacles from the beginning. Get the starting position wrong and you may find financial weights added before the start.

The time and effort being expended around these ratings might be viewed as a worthwhile exercise, with the prize of significantly lower levies. But it must be recognised that resources are being used, perhaps at the cost of more important issues, namely running the scheme.

Another key consideration is a declaration of scheme structure. Since assessments are based on scheme returns to the regulator, now is a good time to ensure the best position is correctly recorded. Possibly like releasing a press statement as to the health of a horse and its declaration as fit to run.

The slightly arbitrary nature of timings has an impact. The timing of the posting of company accounts could alter matters. Like the great race you may prefer soft going – but the weather dictates this, which like company year ends there is little you can do to influence.

As a responsible employer providing an excellent pension arrangement, many sponsors would rather pay an extra £1 to their fund than an extra £1 in PPF levies. But this, in theory, will strengthen the funds requiring lower risk-based levies. So can it meet it’s operating costs on general levies alone? Will the hurdles be made higher to allow for this? Or maybe a completely new calculation?

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Overall, the levy is adding costs to an already overburdened arrangement. But it is also taxing corporate minds for solutions, taking time and adding hugely to costs. Since this is an annual event which is becoming longer and more arduous maybe we will see fewer wishing to take part, meeting a one-off cost to provide a solution. The question is: does this help members and their security?

Time will tell whether this first year of risk-based levies will be a classic for delivering a memorable event or dismissed as a disappointing lottery adding to the compliance and financial burden.