UK Lowers Pension Protection Levy
Tuesday, September 27, 2011

The UK is to overhaul the way compensation is paid in the case of pension scheme insolvency, in a move designed to make the current pension protection levy scheme more stable.

The pension protection levy is paid by all eligible defined benefit pension schemes to fund compensation paid out under the Pension Protection Fund (PPF).

The PPF was established in 2005, under the provisions of the Pensions Act 2004. It is designed to pay compensation to members of eligible defined benefit and hybrid pension schemes when there has been a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover PPF levels of compensation.

A new levy framework will come into effect in 2012/13, and the PPF has began consulting on the rules which will govern this new regime, which it says will be needed to calculate individual levy bills. At present, the PPF changes the way the levy is calculated each year, but the new rules are intended to be fixed for three years.

Other changes include the smoothing of funding levels through a use of market data averages, so that short-term volatility in financial markets is not reflected in the measure of underfunding risk. The system will, in future, contain ten insolvency rating bands, an increase from the six originally proposed. This, the PPF says, responds to industry concerns that six bands would create cliff-edges where schemes could possibly face large levy rises.

It is hoped that these changes will ensure that levy bills can be more predictable than before, and, in turn make the levy more stable. According to the PPF, it will also mean that schemes can expect that if their risk falls over the three years, then so will their levy.

The PPF also announced that the levy for 2012/13 will be GBP550m. This is the lowest levy that the PPF has ever set and marks a reduction from GBP600m in 2011/12, the second cut in two years.

Speaking at an industry conference, Alan Rubenstein, chief executive of the PPF, said: “The further reduction in the amount of levy we want to collect again recognizes our desire to protect employers and pension schemes which are still navigating choppy waters – while remaining mindful that we also have to protect our own financial position. That said, the GBP400 million surplus we posted last year showed that we remain on course for achieving our aim of being financially self-sufficient by 2030. And we expect to have built on that strong foundation when we announce our 2010/11 results later in the year.

Rubenstein concluded: “We are also delighted that we can finally put in place the rules for our new levy framework which enable schemes to plan for their levy bills for the next three years. I would also encourage schemes to take risk reduction measures as they have a direct impact on the amount of levy they pay.”

Commenting on the announcement, Towers Watson, the professional services company, raised concerns over the figures provided by Rubenstein. The firm notes that it is not explained why the PPF believes it now needs GBP50m a year les, saying this will make it difficult to judge whether this money will be clawed back from employers later on. Joanne Shepard, a senior consultant, said: "Lower levies will be welcomed by employers, especially as they are still paying for the PPF to build up a war chest. The government will also enjoy saying that burdens on business are being held down. However, because the GBP550m number has come out of a black box, it's hard to tell whether this is just a temporary reprieve during difficult conditions. Has the PPF really changed its view about how much it ought to be raising in light of the risks it faces? Or is it just seeking to raise less of this money at this point in the economic cycle?"