With the first deadline for the Pension Protection Fund (PPF) levy fast approaching, Stuart Price, partner and actuary at pension experts Quantum Advisory, looks into how the levy is calculated and why it is crucial a company keeps track of its credit score.

Stuart, based at Quantum’s Cardiff head office, says:

“The PPF provides a valuable safety net to members of defined benefit pension schemes and protects members’ benefits should their employer become insolvent. It is funded by a levy on those same schemes, which can be a significant cost for the majority of schemes and their sponsoring employers.

“In partnership with the PPF, Experian produces an assessment of insolvency risk – a ‘score’ – for sponsoring employers which forms a key component of the levy calculation.

“Normally, Experian work out the levy using the insolvency risk calculation from the previous 12 months, however for the 2018/19 period, the credit score company is using the monthly risk scores for the six month period from October 2017 to March 2018 to calculate the average score for the year. From the 2019/20 levy year, Experian will revert back to using monthly scores for a 12 month period.

“There is a common misconception that these scores are correct and ‘final’, and consequently do not require review.

“However, this is not the case, and we have seen many clients overpaying on their levies due to incorrect scores – and it’s not hard to see why. The scoring system is not always easy to follow and the ‘What-if’ tools found on the PPF/Experian portal can be particularly user ‘unfriendly’. It is therefore crucial that appropriate assistance is sought to ensure employers aren’t overpaying.

“The most common reasons for overpayments include employers being placed in the incorrect scorecard or outdated accounts being used – easy to rectify if you know it has happened. There are also ways you can help cut the levy payments further, including certifying deficit reduction contributions that have been paid into the scheme since the last valuation, carrying out bespoke investment stress testing which can override the PPF’s standard stress tests, and putting in place a PPF-compliant guarantee from a parent company. In the case of the latter option, the PPF will use the Experian score of the parent instead of the scheme’s sponsoring employer, potentially reducing the PPF levy if the parent is deemed to be stronger.

“With the deadline to make some of these changes only weeks away, companies are being urged to act now.”

Established in 2000, Quantum Advisory provides pension and employee benefits services to employers, scheme trustees and members from offices in Cardiff, Bristol, Birmingham, Amersham and London.

For more information about Quantum Advisory, please visit: https://quantumadvisory.co.uk/about-us/