DB pension schemes with a 2020 triennial valuation could make significant PPF levy savings by updating their PPF valuation this year, claims Hymans Robertson. These schemes are particularly at risk from having to pay higher PPF levies than they need to in 2022 because their current PPF valuation is from 31 March 2020, when asset prices were depressed due to the impact of the Covid-19 pandemic. At the same time the leading pensions and financial services consultancy is reminding sponsors they need to be considering action well before the usual 31 March 2022 deadline to minimise their PPF levy.

Commenting on the opportunities from an Out-of-Cycle valuation, Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson says:

“DB schemes with a 31 March 2020 valuation should consider an out-of-cycle s179 PPF valuation at 31 March 2021 to reduce the levies. Schemes that fall into this category had a valuation around the time when asset markets were depressed due to the global pandemic. Assets have subsequently recovered, but this is not fully captured by the PPF’s simplified roll forward approach. For example, the PPF’s methodology doesn’t allow for credit spreads so any subsequent recovery of corporate bond holdings won’t be captured.

“An out of cycle valuation captures asset gains since 31 March 2020 that are not caught by the PPF’s more simplified roll forward approach, thereby reducing levies. It is particularly beneficial to those that have high allocations to equities and corporate bonds; both of these could have seen significantly stronger returns than the PPF would assume in their calculations.

“We’ve assessed the levy savings for one £1bn scheme that is in levy band 4 with a 90% PPF funding level, and calculated that completing the out-of-cycle valuation reduces its £300,000 levy by £150,000, thereby halving its PPF levy.

“A common misconception is that you need to do a full actuarial valuation for an out-of-cycle valuation. You don’t; often, these aspects can be explored with minimal time and effort compared to the potential savings. Approximate methods can be used so long as the scheme actuary can certify that, in their view, the liabilities have not been understated. It needn’t, therefore, be a time consuming and costly exercise. You will need audited scheme accounts though, which tends to limit the number of potential valuation dates. It’s well worth corporates considering this in advance of the 31 March 2022 deadline.” 

--------------------------------

For managing PPF levies Hymans Robertson is reminding schemes that the following key points should be considered:

1. Budget – calculating the expected levy - At this stage, a reasonably accurate estimate can be made to establish whether this is in line with expectations and whether any mitigating action might be needed. This is particularly important for companies whose trading has been adversely affected by Covid-19 and are now starting to file accounts that cover pandemic periods. Does the data underlying the insolvency assessment look correct?
2. Potential mitigative action - As a rule of thumb if the levy is over £100k, companies should annually consider whether they’re doing enough to manage the expense.
3. Bespoke stress tests - While for schemes with liabilities under £1.5bn this is optional, it’s well worth considering where there are large holdings of LDI (particularly longer dated index-linked gilts). Additionally, it’s worth considering where steps to manage equity risk (e.g. through use of equity collars) have been taken. You’ll need audited scheme accounts for this. And, given the interplay, it’s worth considering valuation and stress submission together, rather than in isolation, in case action is inadvertently taken that increases the levy.
4. Remember the usual mitigations - For example, if paying significant recovery plan contributions then make sure they’re certified, if guarantees are in place could they be made PPF-compliant?