Defined BenefitMar 23 2017

Pension Protection Fund levy set for a shake-up

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Pension Protection Fund levy set for a shake-up

The Pension Protection Fund has proposed taking large sponsoring companies credit ratings into account when deciding the levy rate to charge defined benefit pension schemes. 

In a consultation on levy rules released today (23 March), the Pension Protection Fund also proposed changing the way it calculates the levies of small and medium-sized enterprises (SMEs) and not-for-profits (NFPs).

The result could see SMEs and NFPs paying "levies that better reflect their risks". In the majority of cases, the PPF stated such firms would pay less than is currently the case.

The result, meanwhile, of taking into account the credit ratings of larger firms would be that "a small number" with bad credit ratings would end up paying "substantially more" to the PPF.

The majority of companies with good credit ratings, meanwhile, would end paying less.

The PPF's role is to protect the members of defined benefit (DB) schemes in the event their fund and its sponsoring employer is unable to meet obligations to members.

It is entirely funded by pension schemes whose members can call on the fund if it went bust.

Schemes at greatest risk of collapse are supposed to pay the highest proportional levies.

The new rules will apply for three years from the 2018 to 2019 tax year.

PPF general counsel David Taylor said the proposed rules would improve the way the lifeboat fund calculates levies.

"We know that stability is important to our levy payers, so we have only proposed changes where we believe there is a compelling case to do so," he said. 

"This reflects our view – supported by feedback – that overall the current levy framework is working well.

"Nonetheless, we have conducted our own detailed review, and carefully evaluated all the feedback received from levy payers and other stakeholders, including the important points raised in the recent Work and Pensions select committee report."

Anything that incentivises schemes to improve governance would ultimately provide better outcomes for members and sponsoring employees.Jon Hatchett

Jon Hatchett, head of corporate consulting at Hymans Robertson, welcomed the PPF's proposed changes to smaller levy payers.

"A third (about 2,000) of schemes contribute only £10m to the total PPF £615m levy; on average these schemes will be making around £5,000 levy payment per year," he said. 

"To manage this, small schemes will be paying advisers each year, which is both aggravating for trustees and uneconomical for the scheme.

“Perhaps schemes who, at their formal actuarial valuation have a risk-based levy below say £5,000 could be given the option to pay the same amount each year until next triennial valuation." 

He said this would "give options" to the scheme.

Mr Hatchett said there was no "compelling reason" why triennial levies would vary from year to year, so this practice would "not be obviously unfair" to the rest of levy payers. 

"And given that schemes will have the option not to pay like this it would not be unfair to them either. Should evidence support the fact that schemes and advisers aren’t gaming the new system, the £5,000 could be raised over time to bring efficiencies to more schemes," he said.

He also argued that schemes with good governance should pay lower levies.

He added, though, that measuring good governance was "a challenge".

He said indicators of good governance such as quarterly meetings and clear objectives, could be used as a check-list for qualification. 

"While there is a risk that this leads to a ‘box-ticking’ approach for some, anything that incentivises schemes to improve governance would ultimately provide better outcomes for members and sponsoring employees," he said.

james.fernyhough@ft.com