The Pension Protection Fund's (PPF) levy charge should be more predictable and proportional to changes in scheme risk to make it fairer to stakeholders, says the Steering Group.

In a report looking at the issues that must be applied in designing a new levy, the Steering Group said changes in a scheme's bill should derive primarily from changes in its risk, therefore making it possible to estimate a scheme's levy for a number of years. Risk reduction by a scheme should be reflected in a lower levy, it said.

Risk characteristics such as employer covenant, measured to a degree of accuracy supportable by evidence; scheme funding; investment strategy, provided this takes into account the range of strategies used by a scheme; and the benefits of risk reduction, such as contingent assets and deficit reduction contributions, should be externally benchmarked.

The PPF should also look at the practicability of extending these suggested risk characteristics to include governance and funding strategy.

The PPF levy's current 'top-down' approach should be replaced with a 'bottom-up' one, ensuring a levy behaves in a fair way. Currently, the Board sets a target amount each year and the risk measure at scheme level is then scaled to meet it. However, the Steering Group acknowledged that this 'bottom-up' recommendation would mean the PPF was no longer targeting collection of a fixed levy amount per year, meaning the levy could become pro-cyclical and more volatile at scheme and overall level.

The Steering Group also recommends that insolvency risk be measured using fewer categories than at present, of maybe seven rather than the current 100, and an end to the annual PPF consultation exercise on the levy, which changes various scaling factors and parameters used in the formula. Instead, the Group says, schemes ought to be able to look at a levy that would remain stable over a number of years, subject to scheme risk changes.

A stronger focus on governance by looking at risks schemes can control (funding, investment strategy and management), is also suggested.

Alan Rubenstein, PPF chief executive, said: "I would like to take this opportunity to publicly thank the members of the steering group for their invaluable contribution on this complex issue."

The ideas will now be considered by the PPF.

The members of the Group include Keith Barton, chairman of the Association of Consulting Actuaries, Katja Hall, director of employment policy, Confederation of British Industry, and Joanne Segars, chief executive at the National Association of Pension Funds.

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