By updating their PPF valuation this year, DB pension schemes with a 2020 triennial valuation could save significantly on their PPF levy says Hymans Robertson.
These schemes are especially vulnerable to having to pay higher PPF levies than necessary in 2022 due to their current PPF valuation being from 31 March 2020, when asset prices were depressed.
Hymans Robertson reminds sponsors that they must take action well before the usual 31 March 2022 deadline in order to reduce their PPF levy.
Hymans Robertson suggests to schemes that the following key points should be considered when managing PPF levies. These are: calculating the expected levy, the potential mitigative action, bespoke stress tests and to remember the usual mitigations.
Hymans Robertson head of corporate DB Alistair Russell-Smith 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 per cent 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.”
