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FAQs: Pension Protection Levy 2009-10

General Questions

How much is the 2009/10 pension protection levy?
The 2009/10 pension protection levy estimate is £700 million (£675 million, indexed with earnings, in line with the Board’s previous commitment.

What has the Pension Protection Fund done to consult on the proposals for calculating the 2009/10 pension protection levy?
The PPF has consulted on the levy a number of times. The 2009/10 Pension Protection Levy Consultation Document confirmed the policy direction established in the August consultation and November 2007 summary of responses. The consultation period lasted four weeks, beginning on 25 September and ending on 23 October 2008. A policy statement setting out the Board’s conclusions on the consultation was published to accompany the 2009/10 determination.

The 2009/10 consultation document and the PPF’s conclusions on the consultation are available on the Levy Publications page

Has the Determination setting out the rules for calculation of the 200910 pension protection levy been published?
The Board’s Determination under section 175(5) of the Pensions Act for the 2009/10 levy year was published in draft in September 2008.  The final Determination was published on 20 November 2008 alongside the the Board’s conclusions on the 2009/10 consultation.

Which schemes are liable to be charged a pension protection levy?
All eligible schemes, as defined in section 126 of the Pensions Act 2004 and the Pension Protection Fund (Entry Rules) Regulations 2005, must pay the scheme-based element of the pension protection levy.

All eligible schemes, except those whose section 179 valuation and any deficit-reduction contributions certificates showed them (after roll forward) to be more than 140 per cent funded, and schemes in a PPF assessment period where a scheme failure notice has been filed, are liable to be charged the risk-based element of the pension protection levy in 2009/10

Do schemes in assessment have to pay the levy?
Schemes in assessment will be charged a nil pension protection levy for 2009/10 provided a failure notice under s122(2)(a) of the Pensions Act 2004 is filed by a scheme on or before 31 March 2009.

If no such notice is received, the scheme will be charged the full levy.

It is therefore important that, if the Insolvency Practitioner is satisfied that there will be no rescue of the scheme or section and the conditions for a failure notice apply, the failure notice is sent to us on or before 31 March. The relevant form is available in the Forms section of the website

Levy Structure & Scaling Factor

What is the pension protection levy and how is it calculated?
The 2009/10 pension protection levy is made up of two parts: the scheme-based levy (20 per cent of the total) and the risk-based levy (80 per cent of the total). The PPF sets a total levy estimate every year, decided by the Board on the basis of a range of information including calculations of its Long Term Risk Model (LTRM).

The risk-based levy is calculated by multiplying a scheme’s underfunding risk by its insolvency risk to determine the scheme’s risk exposure. This is multiplied by 0.8 (because the levy is 80 per cent risk-based), and by a levy scaling factor (LSF), which matches schemes’ individual levy amounts, based on short-term risk, to the total levy estimate, based on long-term risk, ensuring that the total amount collected is close to the estimate.

The formula for the risk-based levy is:

RBL = U x P x 0.8 x LSF

RBL = risk-based levy
U = underfunding risk
P = assumed insolvency probability
0.8 = percentage of the levy that is risk-based
LSF = levy scaling factor (2.22 in 2009/10)

The scheme-based levy is paid by all schemes on the basis of their Pension Protection Fund liabilities, to recognise that all schemes pose some risk to the PPF.

The formula for the scheme-based levy is:

SBL = L x M

SBL = scheme-based levy
L = the scheme’s Pension Protection Fund liabilities, and
M = scheme-based levy multiplier (0.000162 in 2009/10)

Why is there a scheme-based levy multiplier?
The scheme-based levy multiplier makes sure that the scheme-based levy collected by the PPF makes up 20 per cent of the total pension protection levy estimate. For 2009/10, the scheme-based levy multiplier is 0.000162

How does the formula for the 2009/10 risk-based levy scaling factor operate?
The levy scaling factor scales up a scheme’s short-term risk (1 year) to collect the total the Board has decide to raise.  This helps ensure that the total amount raised by the risk-based levy closely matches our levy estimate.

Why is there a levy scaling factor?
The levy scaling factor matches the amount collected from individual schemes to the total levy estimate. This is necessary because the total short-term risk exposure of eligible schemes does not match the levy estimate. The levy scaling factor for 2009/10 is 2.22

What are the assumptions for the 2009/10 levy year?
Certain assumptions need to be factored into the calculation of the levy scaling factor in order to publish it in advance of the levy year. These concern:

• the eligible universe of levy-paying schemes, accounting for new schemes entering the universe and existing schemes leaving the universe due to their entering assessment or becoming ineligible between 1 April 2008 and 31 March 2009;
• new voluntary certificates (contingent assets and deficit reduction contributions) to be submitted by the 31 March and 7 April 2009 deadlines;
• recertification of existing contingent assets by 31 March 2009; and
• appeals made to D&B failure scores as at 31 March 2008, used in the 2008/09 levy.

The PPF has calculated assumptions for each of the categories listed above, based on trends to date, and used these to calculate the levy scaling factor. The key assumptions used in the calculation of the levy scaling factor are:

• a reduction in the eligible universe of levy-paying schemes by approximately 100 schemes;
• certification of a further £8.6bn of deficit reduction contributions;
• certification of contingent assets by an additional 150 schemes;
• approximately 700 schemes successfully appealing D&B failure scores as at 31 March 2008.

How does the final levy scaling factor of 2.22 reconcile with that of 3.77 for the 2008/09 levy year?
Much the most significant factor in the reduction in the scaling factor is the decline in scheme funding between October 2007 and March 2008. The other significant factor is the use of a more empirical approach to estimating the impact of changes to D&B failure scores following appeals removing the need for the underpin used last year.

Taken together, these mean that continuing to use a 3.77 scaling factor would have led to over-collection of levy. So we have reduced the scaling factor, aiming to collect a stable levy.

How much does the PPF expect to collect in 2009/10?
It is difficult to be certain in advance how much levy we will collect.  This is particularly true for 2009/10, where we are setting the scaling factor in advance of the deadlines for certifying new deficit reduction contributions and contingent assets.  However, we believe that based on the information currently available, these assumptions give us a central levy estimate of £700 million.

At what level will the risk-based levy be capped for 2009/10?
For the 2009/10 levy year the risk-based levy will be capped at 1 per cent of liabilities on a section 179 basis as at 31 March 2008. Consistent with previous years, the levy cap will protect around five per cent of the weakest schemes.

Data Submission & Voluntary Certificates

• midnight on 31 March 2008 was the deadline for submission of scheme return data to be used in the 2009/10 levy year;
• 31 March 2008 is the measurement date for underfunding and insolvency risk;
• 5pm on 31 March 2009 will be the deadline for certification/re-certification of contingent assets;
• 5pm on 7 April 2009 will be the deadline for certification of deficit reduction contributions;
• 5pm on 7 April 2009 will be the deadline for notification of full block transfers;
• 5pm on 30 June 2009 will be the deadline for final certification of full block transfers.

Certification of these documents must be done using the Pensions Regulator’s Exchange system. You may find our Guidance on Exchange helpful. Separate certification to the PPF is no longer necessary or possible.

When will I be able to certify deficit reduction contributions, contingent assets and block transfers for the 2009/10 and 2010/11 levy calculations? Can I provide this information to the PPF?
Separate certification to the PPF is no longer necessary or possible.  Information can be entered on the Pensions Regulator’s Exchange system from the following dates:

• 14 November 2008: schemes were able to submit the online scheme return, contingent assets and deficit reduction contributions;
• Early December 2008: schemes will be able to submit block transfer certificates.

Will the PPF accept data corrections to the data provided via the scheme return or voluntary certificates, as in 2006/07 and 2007/08?
From 2008/09 we do not generally accept corrections or updates to data submitted via scheme maintenance, voluntary certificates, or in any other form by the relevant deadlines.

If your scheme’s circumstances change, you should update Exchange with any new information on an ongoing basis. This will save you time when it comes to submitting your next scheme return and help to ensure that all relevant fields are updated for future levy calculations. The information stored in Exchange at midnight on 31 March 2009 will be used in the 2010/11 levy calculation.

Under paragraph 12 of the determination, we may, at any time prior to the calculation or any recalculation of the levy in respect of a scheme, take such steps as we think fit to obtain further or amended information for the purposes of that calculation or recalculation.

If appropriate, our data cleaning team will contact you for this information. Any information made available to us through this exercise should also be entered into Exchange.

However, please be aware PPF is under no obligation to take such steps where information has not been provided to the Board on or before any applicable deadline prescribed in the determination, and will not do so merely because a scheme has been disadvantaged by the failure of those acting on its behalf to supply information at the proper time or in the proper manner.

Block Transfers

Why are there two different submission dates for block transfers? Has the policy in relation to block transfers for the 2009/10 levy year changed?
The policy in relation to block transfers has changed for 2009/10. For further information please refer to the Block Transfer page and also the Consultation Document for 2009/10

Contingent Assets

I put in place a contingent asset arrangement for 2008/09; will I have to re-certify this arrangement for inclusion in the 2009/10 levy calculation?
Yes. If credit is to be given for a contingent asset arrangement in the risk-based levy calculation, that arrangement should be re-certified by 5pm on 31 March 2009.  Re-certification should be completed using the Pensions Regulator’s Exchange system. The PPF will not send out re-certification reminder notices.

I have put a contingent asset in place, can I now reduce it?
Pensions liabilities are long-term in nature. Accordingly, it is important that contingent assets must provide a consistent level of protection over time, to ensure that the reduction in risk-based levy offered to schemes with contingent assets in place is fair. The standard form legal documents published by the PPF are designed to provide a consistent level of protection to scheme trustees.

However, we recognise that trustees may be willing to allow contingent asset cover to be reduced over time, in particular where scheme funding has improved. Each of the standard form legal documents contains provisions whereby the relevant contingent asset may be reduced or replaced on an annual basis, depending on the level of scheme funding as set out in a suitable valuation, any documented special contributions, and any other contingent assets that are put into place.

If a contingent asset is removed or replaced during the levy year, the trustees/managers are obliged to notify us.  We may then reassess the risk-based levy in respect of that scheme.  If the reduction or removal is, in broad terms, consistent with the principles embodied in the standard form document for that contingent asset, then we will continue to give credit for that contingent asset but may increase the risk-based levy to reflect the reduced contingent asset cover.  If the reduction or removal is inconsistent with the principles set out in the documentation, then the risk-based levy for the year will be recalculated as though the contingent asset had never been in place, and no further credit will be given for that contingent asset.

We will not recognise a contingent asset in future years if its value to the scheme has been reduced in a way that is inconsistent with the principles set out in the documentation, until the scheme has reached a level of funding that would have rendered the reduction permissible.  

I have put in place/am considering putting in place a parental guarantee for my scheme. The parent company is based in a foreign country, how can I find out their insolvency risk?
There are two steps to find this information:

1. Contact D&B’s helpline for Pension Protection Fund related queries on 0870 850 6209 to obtain a failure score for the overseas company, or

2. Contact the Pension Protection Fund Stakeholder Support Team on 0845 600 2541 providing details of the country of domicile of the overseas guarantor and the corresponding failure score provided by D&B. The Pension Protection Fund will provide the company with a probability of insolvency for that failure score.

Do contingent assets (particularly Type B) fall foul of the statutory restrictions on employer-related investments?
Ultimately this is a question of statutory interpretation. Our interpretation is that contingent assets of the types we will recognise for levy purposes do not constitute an investment of scheme assets/resources of the scheme by the trustees, and therefore the restrictions are not relevant.

Must letters of credit and bank guarantee contingent assets (Type C (i) & C (ii)), be denominated in sterling?
Yes.  The standard form Type C documentation refers to pounds sterling only and the associated Type C certificates similarly require the amount guaranteed to be in sterling.

The proposed guarantor for a type A arrangement is an associate of an employer of the scheme but is also an employer of the scheme itself. Can it be the guarantor in a type A arrangement in these circumstances?
Yes.  Paragraph 6.2.1 of the contingent asset guidance summarises the Board's requirements in respect of a guarantor. One of the Board's requirements is that the guarantor must be an “associate” (within the meaning set out in section 435 of the Insolvency Act 1986) of at least one of the participating employers in the scheme. One employer of the scheme may provide a guarantee in respect of other employers of the scheme provided that it is an associate of at least one of the other participating employers (and will then have to guarantee the obligations of all employers which are associates of the guarantor).

Underfunding

What happens if I missed the 31 March 2008 deadline for submission of an initial section 179 valuation?
Where the mandatory s179 valuation has not been submitted by 31 March 2008, we will calculate the levy as follows:

• the estimated section 179 valuation as at 31/10/06 used in your 2007/08 levy invoice calculation that was obtained by converting your MFR valuation (i.e. the first step described above) will be treated as if it had been submitted to us in the usual way;
• this will be rolled forward to the calculation date (31/03/2008 for 2009/10) in accordance with our standard formulae, but the value of the scheme’s assets will be reduced by 5 per cent for each year between the effective date of the MFR and the calculation date.

In consultation with the Government Actuary’s Department, we developed a methodology for adapting MFR valuations to estimate liabilities on a section 179 basis. This methodology had three key steps:

• transform liabilities from an MFR valuation basis to a s179 valuation basis
• roll forward the value of assets and liabilities to a common date, and
• allow for the Pension Protection Fund levels of benefit in the rolled forward liabilities.

For the 2009/10 levy which section 179 valuation will be taken into account?
The 2009/10 levy will take into account the most recent section 179 valuation submitted by midnight on 31 March 2008, as announced in November 2007.  

Will the new section 179 valuation assumptions affect my 2009/10 levy?
The 2009/10 levy will be based upon the PPF’s estimate of your section 179 position at 31 March 2008 using the valuation information submitted by that date. The intention is that the new valuation assumptions will be used in that estimate.

The new assumptions will not change the overall levy quantum that the PPF intends to collect for 2009/10. But the proportions in which this levy is allocated between different schemes will be affected by the new assumptions

Insolvency Risk

See the D&B methodology FAQs for the latest information.

Multi-employer schemes

How will you measure the insolvency risk of multi-employer schemes for the 2009/10 levy year?
We will calculate the weighted average of the probabilities of insolvency of all the sponsoring employers. The weighted average will then be multiplied by a factor to ensure the correct hierarchy of risk is maintained between the various types of multi-employer schemes.

This factor will be:

• 1 for those schemes with an option or requirement to segregate;
• 0.9 for a last man standing associated scheme;
• the number of members of the employer with the most members divided by the total number of members for the whole scheme for a last man standing, non-associated scheme.

What is the Pension Protection Fund’s definition of a sectionalised/segregated scheme?
Pension Protection Fund legislation refers to segregated schemes which are defined as follows by regulation 1(2) of the Pension Protection Fund (Multi-employer Schemes) (Modification) Regulations 2005:

A “segregated scheme” means a multi-employer scheme which is divided into two or more sections where

(a) any contributions payable to the scheme by an employer in relation to the scheme or by a member are allocated to that employer’s or that member’s section, and
(b) a specified proportion of the assets of the scheme is attributable to each section of the scheme and cannot be used for the purposes of any other section.

As such schemes are commonly referred to as sectionalised schemes; both terms are used in these FAQs to ensure all relevant schemes are aware that these FAQs apply to them.

How does the Pension Protection Fund treat sectionalised/segregated schemes for levy purposes?
Each section of a sectionalised/segregated scheme is treated as if it is an individual scheme. For each section, the Pension Protection Fund will request separate data and issue a separate invoice.

I am a last-man-standing scheme, how do I know if I am associated or non-associated?
Treatment as a last-man-standing non-associated scheme is at the discretion of the Board of the Pension Protection Fund based on evidence supplied by the scheme and/or otherwise available to the Board. Evidence could include relevant parts of the Trust Deed and Rules, scheme booklets, and any booklets for employers. We reserve the right to contact schemes to request further information.

When completing the annual Scheme Return issued by the Pensions Regulator in respect of a multi-employer scheme, how should I apportion orphan members, and members who cannot be assigned, to the remaining participating employers?
Orphan members and members who cannot be assigned to the current participating employers, for whatever reason, should be allocated between the remaining participating employers of the scheme in proportion to the number of non-orphan scheme members belonging to each participating employer.

For example, assume a scheme has 120 members in total and 60 of these cannot be apportioned. There are 3 remaining participating employers with the following number of members:

Employer A - 10 members
Employer B - 20 members
Employer C - 30 members

The remaining 60 members should then be allocated in the same proportions i.e. 10 members to Employer A, 20 members to Employer B and 30 members to Employer C giving the following totals to be entered on the Participating Employers form:

Employer A - 20 members
Employer B - 40 members
Employer C - 60 members