Defined Benefit  

Consolidators to pay special levy for pensions lifeboat

Consolidators to pay special levy for pensions lifeboat

New defined benefit (DB) consolidators will pay a levy to the Pension Protection Fund (PPF).

In a consultation launched today (20 September), the pensions lifeboat is proposing the levy for DB pension schemes in 2019 to 2020 will be £500m, 9 per cent less than the previous year.

This levy is one of the ways the PPF funds compensation for members of schemes which transfer to the pensions lifeboat, and the new consolidators will have to contribute to this using a special calculation, the PPF said.

In its white paper on DB schemes, published in March, the government revealed plans to promote consolidation in the DB market to address concerns about the fact two thirds of the 5,600 schemes had funding shortfalls.

So far there are only two consolidators: the Pension Superfund, which launched in March but has not taken in any schemes yet, and Clara Pensions, which will launch later this year.

They will both have their levy calculated using the methodology created by the PPF for zombie schemes.

These rules were created in 2017 following to the BHS case, as the negotiations after the company went into administration in April 2016 ended in a £363m settlement with Sir Philip Green to fund a new independent pension scheme for 19,000 former BHS workers.

The existing methodology for schemes without a substantive sponsor will be adjusted to ensure it reflects the particular risks posed by consolidators, the PPF said.

But the pensions lifeboat argued effective regulation was needed to secure control over risks, and that "much uncertainty remains over the shape and structure of these vehicles".

The levy is payable by all UK DB pension schemes whose members would be eligible for PPF compensation if the scheme employer became insolvent and there weren't enough assets to pay benefits at PPF levels of compensation.

FTAdviser previously reported that consolidation was a top priority for the DWP, which has been having discussions with the industry on this topic – a consultation on this matter is expected to be published this autumn.

Under the new rules for consolidators, the PPF is proposing that the value of the levy would be increased in the event that there is no requirement for the arrangement to wind up, if funding falls below a minimum threshold.

The lifeboat will also ask consolidators to implement asset stresses and an end of year recalculation mechanism, to reflect respectively the risks of profit extraction and new transfers in.

PPF will also put in place appropriately prudent assumptions for consolidators if they do not provide key information - particularly valuations - at the required frequency.

The Pension Superfund has already seen a reshuffle of its leadership team this week when it promoted head of asset liability management Luke Webster to chief executive, after its former boss Alan Rubenstein, and one of its main investors, Warburg Pincus, announced their departure