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Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006

rose to move, That the Grand Committee do report to the House that it has considered the Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006 [15th Report from the Joint Committee]. The noble Lord said: The Committee will be aware that the PPF is funded through annual levies on eligible schemes. The Pensions Act 2004 requires the board to set two levies: a scheme-based levy that must take into account the level of a scheme’s liabilities; and a risk-based levy that must reflect the level of underfunding in a scheme and the risk of a scheme’s employer becoming insolvent. The Act requires the board to collect at least 80 per cent of the total amount raised through the risk-based levy. That ensures that the levies give due recognition to well funded schemes with strong sponsoring employers, and makes the risk-based levy much more important than the scheme-based one. The detail of how the risk-based levy is to be calculated, within the parameters set by the Act, is a matter for the board, which has the appropriate expertise for what is a very technical subject area. The PPF published its first proposals in a consultation document launched in July last year. It received a large number of responses—around 200—from a wide range of individuals and organisations. The PPF published its final proposals in December. It is fair to say that this has been widely welcomed. The PPF responded to the views of industry and made some important changes to its original proposals. For example, it reduced the limit on the amount any one scheme can pay; it is now 0.5 per cent of a scheme’s total liabilities. It also extended the deadline for submission of information to 31 March. The PPF also made changes to encourage schemes to improve their funding position before the start of the 2006–07 levy year. Schemes and employers now have the opportunity to reduce significantly the amount that they would otherwise pay. There are three parts to this: any scheme which is over 125 per cent funded on a PPF basis will not have to pay any risk-based levy. Secondly, cash contributions made since the scheme’s last valuation and up to 31 March will be taken into account by the board. Thirdly, the board will reduce the risk-based levy if schemes and employers put in place arrangements that release cash or other assets into pension schemes on the insolvency of the scheme’s employer. Such arrangements are sometimes known by the generic term ““contingent assets””. These regulations are concerned with such arrangements. The PPF will be considering three key types of contingent asset, the first of which is a guarantee given by another company in the same group as a scheme’s sponsoring employer. Such a guarantee will, typically, be given by a parent company and will require the parent to pay a set amount of money into the scheme in the event of the insolvency of the sponsoring employer. Secondly, an alternative arrangement is for the sponsoring employer to give the scheme security over particular assets, so that if the sponsoring employer becomes insolvent those assets revert to the pension scheme. Thirdly, the premium may be paid to a third party, such as a bank, to provide insurance-style cover, so that, should the sponsoring employer become insolvent, the third party pays a sum of money to the scheme. A large number of respondents to the PPF’s consultation exercise requested that the PPF take account of such arrangements; and the PPF has been keen to do so. They have clear benefits for both employers and the PPF. The existence of contingent assets reduces the risk any one scheme poses to the PPF, by providing a flow of cash into the scheme on insolvency of the sponsoring employer. The arrangements offer a cheaper and quicker way of reducing the employer’s risk-based levy rather than making payments to the scheme to reduce the actual deficit. In simple terms, the PPF will take account of contingent assets in the risk-based levy calculation by reducing the level of a scheme’s underfunding in accordance with the value of the arrangement. However, the PPF has recognised that it cannot accept any contingent asset, nor can it take all contingent assets at face value. This is because there are potentially a number of risks associated with such arrangements. For example, there could be problems of enforceability. If a guarantee is given by a company based overseas, the PPF may not be able to enforce that guarantee. Similarly, the guarantee may not operate in the same circumstances as those in which the PPF must assume responsibility for a scheme. There are also risks around the strength of the guarantee; most obviously, the guarantor could itself become insolvent. To minimise these risks the PPF has produced standard documentation that must be used. This will ensure that the arrangements are legally robust and match the circumstances in which the PPF must become involved with a scheme. In addition, the PPF will only consider guarantees where the guarantor is based in the OECD. Lastly, for group guarantees, the value of the contingent asset will be reduced to reflect the likelihood of the guarantor becoming insolvent. The regulations under consideration today are needed to allow the PPF to take account of contingent assets in the calculation of the risk-based levy. It is important to note that the regulations themselves do not specify the detail of how this will be done; this remains for the PPF to decide. As these regulations allow the PPF to respond to requests from industry, and allow individual schemes an opportunity to reduce their risk-based levy, I strongly commend them to the Committee. I am satisfied that the instrument is compatible with convention rights. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006 [15th Report from the Joint Committee].—(Lord Hunt of Kings Heath).
Type
Proceeding contribution
Reference
679 c193-5GC 
Session
2005-06
Chamber / Committee
House of Lords Grand Committee
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