How to reduce your PPF levy

The PPF levy can be a significant cost for some companies, but there are a number of ways that the levy can be reduced. Some of the actions available to reduce the PPF levy are explained on this page.

1. Contingent assets  

One way to reduce the PPF levy is to put in place a contingent asset. The different types of contingent assets are listed below:

• guarantees given by other companies in the group (Type A)
• security over cash, UK real estate and securities (Type B)
• letters of credit and bank guarantees (Type C)

A Type A contingent asset can be used to substitute the insolvency risk of a scheme’s sponsoring employer with that of another group company. This can be particularly useful in a case where, for example, the sponsoring employer is relatively weak, but the parent company is very strong.

Type B and C contingent assets are added to the scheme assets in the levy calculation, thereby reducing the scheme’s perceived underfunding risk.

Any certifications of contingent assets from the previous levy year need to be recertified on an annual basis. The PPF provides standard documentation that must be used if the contingent asset is to be taken into account in the levy calculation.

2. Deficit reduction contributions

A deficit reduction contribution is a payment made to reduce the scheme’s deficit.  As this reduces the scheme deficit, the PPF allows these contributions to be taken into account in the levy calculation.

To do this, contributions need to be certified via the Pensions Regulator’s online exchange system by the required deadline.

3. Submission of Section 179 valuations

Section 179 valuations must be provided to the PPF through the Pensions Regulator’s online exchange system within 15 months of the effective date of the formal actuarial valuation.

The results can be submitted at any time before this 15 month statutory deadline, so if a scheme’s funding position has improved compared to the previous valuation, it may be worth submitting the results in advance of the statutory deadline to reduce the PPF levy payable.

Schemes may also consider commissioning an out-of-cycle Section 179 valuation if the scheme’s funding position is expected to have improved since the results of the previous valuation were submitted.

4. Improving insolvency risk scores

Insolvency risk is a key part of the levy calculation, so you should make sure that you understand how your company’s score is being calculated. You should also ensure that the company information being used by Dun & Bradstreet (D&B), the PPF’s insolvency risk partner, is accurate. 

We have an in-depth understanding of the insolvency risk model and have advised a number of employers on the actions available to improve their insolvency risk scores.

5. Modelling investment risk

The levy calculation adjusts a scheme’s assets to reflect average market conditions over the previous five years, and also applies a stress to reflect the impact of adverse market conditions.

As a result, the way that the asset allocation is disclosed in the annual scheme return, and the specific details of the stress calculation, can have a significant impact on the PPF levy that is paid. For schemes with liability hedging strategies in place, it is particularly important that the corresponding reduction in risk is fairly reflected in the levy calculation.

If you are concerned about the size of your PPF levy, or would like to discuss the options to reduce your levy in further detail, please contact your local Barnett Waddingham contact, or email Lewys Curteis.