Following a formal consultation (see Aries article), the Board of the Pension Protection Fund (PPF) has published its final levy determination for 2012/13. As expected, it confirms the levy estimate for the year as £550 million, the lowest the PPF has ever set. 2012/13 will also be the first year of a new levy framework, intended to deliver greater predictability and stability for levy payers. The rules governing this new framework will be set for the next three years, barring extreme circumstances.

The risk-based levy scaling factor will be 0.89 and will now take account of investment risk and allow for how the scheme's assets and liabilities will react to certain stress scenarios - there is no change from those listed in the PPF's consultation earlier this year. The risk-based levy will be capped at 0.75% of smoothed* liabilities whilst the scheme-based levy multiplier will be 0.000085.

* the funding position will be averaged over a five year period rather than using a specific point in time.

A controversial proposal in the consultation required certification of the ability of guarantors of Type A contingent assets to meet the guarantee, which many saw as in effect requiring a costly annual covenant review of all guarantors. Recognising the force of the argument against this, the Board has made a couple of changes in the final determination. It has adopted instead a "negative certification", so that trustees (or their authorised representatives) will be required to certify that

"The trustees have no reason to believe that each certified guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset as certified."

In addition, trustees will have the option of certifying a lower amount than the face value of the contingent asset, or of only reporting the most substantial guarantors, if they do not feel that they can otherwise provide the certification regarding the guarantor's strength.

To secure a reduction in their levy,schemes need to act quickly: scheme returns must be submitted via TPR's Exchange system by 5 pm on 30 March 2012 (scheme returns were sent out from 5 December). The PPF has also reminded schemes that:

1. investment risk will be included in the levy calculation for the first time in 2012/13, so trustees should be careful to identify and categorise assets correctly; and
2. Dun & Bradstreet is now measuring insolvency risk (using ten bands) on a monthly basis, rather than a year in advance as before. Monthly scores from 28 April 2011 to 30 March 2012 will feed into the 2012/13 levy calculations.

To help schemes, the PPF has published guidance on

• investment risk,
• contingent assets;
• block transfers; and
• levy practice.

Annual Report

The PPF's annual report for the year to 31 March 2011 has revealed a surplus of £680m, which equates to a funding level of 105.1%, around 2% better than the previous year. Whilst invested assets have swelled from £4.4 billion to £6.3 billion, the PPF has also managed to improve efficiency, with expenses per member dropping by 15%. This good news, despite riding an "economic storm" and total transferees now measuring 75,000, suggests the PPF is more likely than last year to meet its goal of self sufficiency by 2030 (the probability has increased from 83% to 87%, says the Board). It remains unclear, however, to what extent the PPF has factored in the consequences of having to accept a very large scheme such as Nortel Networks (estimated deficit over £2 billion; currently in assessment).

Latest PPF 7800 Index

While this substantial surplus coupled with the lowest-ever levy paints a rosy picture, the latest PPF 7800 Index isn't so bullish. The aggregate deficit of the 6,533 schemes in the PPF 7800 index** is estimated to have increased over the month to £222.1 billion, from a deficit of £158.6 billion at the end of October.

** the latest estimated funding position, on a s.179 basis, for the defined benefit schemes in its eligible universe.