The Pension Protection Fund (PPF) was set up in 2005 to guarantee a proportion of the retirement income of Defined Benefit (DB) Scheme members under the event of insolvency of their sponsoring employer(s). The fund is sustained by an annual levy applicable to all schemes eligible for protection under the PPF. This levy is determined by a combination of scheme specific and risk based factors.
The PPF is consulting on plans for the pension protection levy over the next three years due to a number of factors: The PPF have developed a wealth of insolvency experience over the last nine years and want to develop a levy which reflects this knowledge to better effect for their stakeholders. It has also moved to a new insolvency provider, Experian, which has developed a PPF-specific model of risk calculation; this reflects significant differences between the nature of the average UK business (on which a generic model is trained) and of the typical sponsor of a DB pension scheme. For charities, they source the data to inform this model from the Charity Commission and Companies House (if appropriate).
What does this mean for charities?
Many charities as sponsoring employers are impacted by the annual scheme levy imposed by the PPF.
For the first time, the PPF are intending to develop a separate scorecard for the not for profit sector; these scorecards are determined by a number of factors such as scale of profitability, gearing, liquidity and cash flow. The consultation contains revealing data about the historic low insolvency rate of not-for profits in the PPF universe of DB scheme’s that fall under their protection; and is more predictive than its predecessors, this means that generally speaking, the introduction of the scorecard, may result in lower risk based levies for not for profits and charities. CFG worked with the PPF in 2009 to impress upon them the need to treat charities differently in their approach to addressing risk; we are therefore pleased about the direction of these developments to understanding the unique pressures charities are under when managing their finances compared to commercial entities.
This comes with a health warning however. Experian has developed a more sophisticated approach to assessing risk, based on experience of insolvency amongst those entities sponsoring DB pension schemes. Under the previous methodology a more broad brush approach was used; this generally meant that charities were viewed as low risk. Whilst not-for-profit entities generally pose a lower insolvency risk than corporate entities, not all charities share the same financial security. The new more scheme specific approach will mean that many charities will feature as ‘outliers’ on the risk assessment, and consequently may well have a higher levy in future.
CFG will be responding to this consultation, focusing on the following questions:
- Does the not-for profit (NFP) definition employed in the NFP scorecard accurately reflect our understanding of what an NFP entity looks like in terms of its financial security variables?
- Are there entities which are believed to have not for profit status not covered by the scorecard or vice versa?
- What will the impact of the move to FRS102 under the eagerly awaited Charity SORPs’ have on the risk ratings?
- Does the levy treat multi-employer schemes within an appropriate risk framework?
- The new levy introduces investment risk into the measurement of a DB schemes underfunding. Does the risk framework take into account the charities’ own investment strategies, as informed by their covenant appropriately?
In the meantime we would encourage charities to consider the impact that the new levy could have on them, and to provide Experian with data concerning their charity accounts where possible so that their score rating is as accurate and reflects the most up to date, true and fair position of the charities financial position.
Experian offer a free online portal on which pension scheme trustees and their advisers can view the scores for their sponsoring employer(s) – and the data that is held on them. Experian are emailing pension scheme trustees specified as contacts on The Pensions Regulator’s Exchange system, with information on how to log on, including their password. Experian and the PPF are encouraging everyone to check their scores, and the data being used. If you are having problems you can contact Experian at email@example.com or on 08444 810810’.
You can find a copy of the consultation document here. CFG will be responding to this consultation. Please send all comments and questions to firstname.lastname@example.org