30/9/2009

By Sophie Baker

The Pension Protection Fund (PPF) has announced plans to reduce the cap on its levy to 0.5 per cent, and has reduced the levy scaling factor from 2.22 to 1.64.

In keeping with its promise to maintain the levy for three years, the pensions lifeboat has confirmed that the 2010/11 levy will remain at £700million, indexed to wages (£720million). The move to reduce the cap on the risk-based pension protection levy to 0.5 per cent, from one per cent, will ease the burden on more hard-pressed schemes, and help protect ten per cent of the schemes which pay the levy. When the cap was at one per cent, only five per cent of vulnerable schemes were protected.

“We announced in 2007 that we planned to keep the levy stable for three years and we have delivered on that commitment,” commented Alan Rubenstein, PPF chief executive. “We now want to help further ease the burden on employers and pension schemes during these difficult times for business.

“That is why, to help protect more of the most vulnerable schemes, we decided to reduce the cap on the amount of risk-based levy schemes pay. This means that these schemes will not pay a risk-based levy of more than 0.5 per cent of their PPF liabilities.”

Rubenstein added that all schemes will pay less than if the PPF had allowed the levy to rise in a reflection of the true level of risk it faces.

The decision has been met with mixed responses from the industry, with Watson Wyatt focusing on the fact that up to 90 per cent of employers will be forced to pay more in order to reduce the levies of the ten per cent of schemes deemed most risky.

The financial consultant’s John Ball, head of defined benefit consulting, said: “The PPF is presenting lower levies for the employers who are struggling most as an act of charity, but the money is going to come from other companies with defined benefit pensions, few of whom are awash with cash. After saying it wants levies to reflect risk more closely in future, it has decided to do the opposite in the short-term. Employers who thought the PPF wanted them to try to maintain their funding levels as much as possible will wonder why they’re being published.”

Punter Southall noted that the impact on individual companies in terms of the levy depends on several factors. A statement from the firm said: “Although the deadlines have passed to take action to reduce your 2009.10 PPF levy, scheme sponsors and trustees should understand the likely level of future levies and take action now to reduce these levies.”

And Barnett Waddingham’s Paul Jayson, partner, added: ““The reduction in the levy scaling factor is a bit of a red herring as it is there just to balance the figures. Most schemes deficits will have increased so they should not necessarily expect to see a reduction in the levy just because the scaling factor has reduced.

“The only way to reduce the cost of the PPF is to reduce the level of benefits. This consultation doesn’t fill me with confidence and there will currently be some people concerned about the long term viability of the PPF.”

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