The Pension Protection Fund (PPF) is to consult on changes to its levy to cater for pension funds operating as standalone entities without a sponsor.
The consultation could have a direct effect on the British Steel Pension Scheme (BSPS), as its trustees believe it can exist without the support of its sponsor, Tata Steel, and without posing a significant risk to the PPF.
Tata Steel wants to sever all ties to the pension fund as part of a deal to keep open the Port Talbot steel plant in Wales.
In a document published on its website yesterday, the PPF said its existing methodology for calculating its annual levy “may not calculate an appropriately risk-reflective levy” for schemes without a sponsor.
In the new year, the PPF will open an industry consultation asking for feedback on updating the levy to account for such a situation, suggesting it expects more closed DB schemes to attempt to go it alone.
The levy acts as an insurance premium payable to the PPF by private sector DB schemes.
It primarily takes into account a scheme’s funding position and the strength of its sponsor.
Without a sponsor, the scheme is still covered by the PPF but, the lifeboat fund argued, is not paying an appropriate premium.
In a September consultation on changes to the industry levy, the PPF explained: “Where a scheme is running on outside the PPF – i.e. with no genuine sponsor – the PPF is exposed to the risk that the funding position deteriorates, since it is in this scenario that entry to the PPF is likely to be triggered.”
The PPF said it was “concerned about the risks posed to levy payers and members” by schemes running with a shell company as a symbolic employer – the outcome currently favoured by BSPS.
In such cases, the PPF said it “becomes directly exposed to the risk of failure in the scheme’s investment strategy”.
“This is not our intended role,” the lifeboat fund said. “We were established to act as a second line of defence for scheme members after the employer, and we have seen cases where a scheme’s funding, even under supposedly low-risk investment strategies, can deteriorate significantly.”
In the case of BSPS, the trustees have argued that its investment strategy is sufficient to protect benefits above the levels granted by the PPF.
During the summer, BSPS made use of a flexible currency and interest rate hedging strategy to position itself ahead of the EU referendum in the UK.
The drop in sterling benefited its overseas equities, which were later sold to lock in gains and redeployed into lower-risk assets.
These gains helped virtually eliminate a substantial deficit recorded at the start of the year.
The £15bn (€17.8bn) fund won an IPE Gold award for its long-term investment strategy last month.
The PPF has delayed the full publication of its 2017-18 levy rules, instead bringing out a provisional document with a view to publishing the full update with the results of the consultation by the end of March 2017.
While the levy may not be constructed to take into account schemes without employers, such arrangements do exist.
Roughly 10 years ago, the Pensions Regulator allowed two schemes – Trafalgar House Pensions Trust and Polestar Pension Scheme – to enter arrangements separating them from their employers and operating as standalone entities.
The Trafalgar House still operates and provides administration services to other pension funds, but Polestar collapsed into the PPF in 2011.
Last year, independent consultant John Ralfe wrote to the Pensions Regulator criticising the Trafalgar House arrangement and claiming it was paying a far lower levy to the PPF than was appropriate for the risk it posed.
In response, Lesley Titcomb, chief executive of the Pensions Regulator, emphasised that “we weigh up very carefully the risks to members and the PPF where a restructuring proposal is put to us that involves the removal of employer covenant”.
He added: “Where appropriate, we are prepared to work closely and collaboratively with trustees and employers to reach the best available outcome and to put appropriate risk monitoring in place.”