The Pension Protection Fund (PPF) should consult on ending its practice of automatically increasing compensation payments, and on its option of applying for the Secretary of State for Work and Pensions to reduce compensation payments to help ease pressure on defined benefit (DB) pension schemes, says Mercer.

The financial consultant expects the PPF to address the fact that the 2010/11 levy year will be the last in which the PFP is obliged to keep to its three-year commitment to keep the total levy collected at a stable level. The autumn consultation on the 2011/12 levy is expected to look at this, but the consultant said the PPF's outstanding plans to amend the levy formula, to take account of investment risk, means employers and trustees are in limbo as to the certainty of how their exposure to the levy could develop over the long-term.

"The PPF's accounts suggest that it has a large funding deficit to fill, so for un-capped levy payers, larger increases are possible post 2010 to help fill this hole," commented Deborah Cooper, head of Mercer's regulatory team. "While the PPF plays an undeniably positive role, we believe that as much consideration should be given to schemes that pay the levy as is given to scheme members that do now, or will in the future, receive PPF compensation. Schemes need a break."

Mercer said the PPF should take a leaf out of employers' books, who are addressing the state of their pension deficits by asset allocation reviews, increasing contributions, or reconsidering the scheme's benefit structure.

"When the PPF next consults with stakeholders about increases to the levy, it should ask for views about the circumstances in which increases in the levy should be offset by reductions in compensation," Cooper added.

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