The newly proposed Pension Protection Fund (PPF) Levy calculations will not give credit to pension schemes that have reduced their investment risk through certain liability-driven investment (LDI) strategies, fears PricewaterhouseCoopers LLP (PwC).

Responding to the consultation on the Future Development of the Pensions Protection Levy, which closed on 17 February 2009, Raj Mody, partner and chief actuary at PwC, acknowledged that the PPF had a difficult task in trying to balance simplicity with accuracy in its levy calculations but warned that the proposed changes would "not necessarily reward those schemes that have taken steps to reduce their investment risk through certain liability-driven investments".

At the same time, schemes which have taken more blunt asset allocation decisions may get undue credit, for example recognising bond investment even if those bonds are junk quality," said Mody.

He also said that research by PwC shows that UK pension schemes may have LDI covering assets which are in excess of £100bn, causing a material issue for some schemes.

"The omission also raises some pertinent questions about the cost vs. benefit of LDI strategies. If it is not simple enough for the PPF to reflect in its levy calculations, there is a question around how companies and trustees can be confident they are making well-informed decisions when adopting LDI techniques. With unprecedented market volatility and economic conditions, sponsors and trustees need to be careful that their decisions are not based on out-of-date analysis or historic measures - there is a danger otherwise that they are undermining their risk position rather than improving it," he added.

Duncan Howorth, president at the Society of Pension Consultants (SPC), said the government should consider temporary PPF levy amnesties or reductions for those companies in financial distress, following the consultation's decision to allow the PPF levy ceiling to rise by 3.6 per cent.

"The decision is potentially very dangerous for UK businesses. There is every prospect that the new ceiling will be utilised when levies are next set - adding another £100million to the levy collection," said Howorth.

"Given the severe economic conditions we face, it is difficult to visualise any outcome other than the burden of a growing PPF deficit falling on a smaller population of DB schemes and the vicious circle spiralling out of control."

- Pensions Age February 2009

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