Why we’ve introduced the limit
We’ve introduced the limit to support schemes whose levies would otherwise increase significantly as a result of employers, that remain viable, seeing downgrades in insolvency risk scores due to the impact of COVID. We expect to apply the 25 per cent limit in most cases where risk-based levies would otherwise rise by more than 25 per cent. The application of the limit is set out in Rule C2.4 of the Determination.
When we’d not apply the limit
In the vast majority of cases we expect to apply the limit. But we do have the ability to disapply it where capping a levy increase would be counter to the intent of the policy. We may therefore consider disapplying or modifying the limit where the levy increase appears to be predominantly unrelated to insolvency risk downgrades. We’ve identified four key areas where this might be the case:
- Where there are significant changes in scheme size, measured by liabilities. We may also use other information including underfunding to understand the impact of the change in liabilities
- Where underlying contingent assets or ABC arrangements have been removed or modified
- Where a scheme’ sponsoring employer is subject to a score override because of an insolvency event
- Where a scheme’s sponsoring employer or guarantor loses its Special Category Employer status.
We’ll take a proportionate approach in our decision making, and will contact schemes to discuss specifics further, if we need to.
Most common reasons where we’d disapply or modify the limit
The information below covers the most common circumstances where we’d expect to consider disapplying the limit. The list isn’t exhaustive, so if you’re concerned about a particular scenario, please contact us at [email protected]
A change in the scheme size due to a transfer
The limit supports schemes where increases in the levy are a result of a change in insolvency risk, not an increase in the size of the scheme.
To reflect this, where there has been a full Block Transfer, we’d be likely to alter the base levy that the 25 per cent limit is applied to. This would be done by summing the levies of the transferring and receiving scheme from the prior year and applying the 25 per cent limit to that.
Where it appears there has been a material partial transfer, we might seek information on the transfer and take a similar approach – including a proportion of the transferring scheme’s invoice value (rather than the whole value) in the base levy. In the absence of information to explain significant increases in liabilities we might disapply the limit altogether.
If a new scheme with no transfers has no 2021/22 invoice to calculate the limit against, in most cases the limit will not apply.
If the new scheme has been created and is the recipient of an exempt or block transfer, we’ll aim to identify the predecessor scheme and use its levy as the base to calculate the limit, taking account of the transfer.
Release or modification of contingent assets
If it appears that a guarantee has been released or modified, we may contact the scheme to understand the circumstances surrounding that and, if we feel it would be more appropriate, base the limit for 2022/23 on what the 2021/22 levy would have been if the guarantee hadn’t been in place.
However, we recognise that in some cases the cost of certifying will be disproportionate to any levy reduction, because of the 25 per cent limit, and some contingent assets may not be recertified or will only be certified for a nominal sum.
In these cases, we may seek reassurance that the underlying guarantee hasn’t been released or modified to reduce its value to the scheme. We encourage schemes where the contingent asset hasn’t been removed or modified to certify on Exchange for a nominal realisable recovery (e.g., £1) as this provides an opportunity to confirm the underlying guarantee remains in place. It also has the added advantage of supporting certification in other years – for example making sure that the scheme can routinely monitor the guarantor’s levy band.
A sponsoring employer is subject to a score override due to an insolvency event
Where an employer score is subject to an insolvency override, an insolvency/insolvency-like event will have already occurred. If the main reason for the increased insolvency risk score is because of an insolvency event, we won’t apply the limit.
An employer’s or guarantor’s Special Category Employer status for 2021/22 no longer applies in 2022/23
If a Special Category Employer status no longer applies, this isn’t a temporary change in insolvency risk and we won’t apply the limit.
Levy increase is influenced by worsening under-funding and an increase in insolvency risk
If the increase to a scheme’s risk-based levy is driven predominantly by an increase in insolvency risk we expect to apply the limit, but we’ll investigate cases where there have been significant changes to underfunding as a result of changes in liabilities. This will help us understand the reason for the change and inform our decision on whether to apply the limit.
Sponsoring employers can move scorecards for many reasons. We recognise that one reason could be a reduction in turnover, which could be COVID related. We expect to apply the limit where the scheme’s sponsoring employer has moved scorecard, resulting in an increase in risk-based levy.
Schemes with a zero/low RBL which no longer applies in 2022/23
We’ll still apply the 25 per cent limit to schemes that had a low/zero risk-based levy in 2021/22, but if there has been a material change in the size of the scheme – or a change to an underlying contingent asset – then we may contact the scheme to understand the reasons and potentially material change in the size of the liabilities.