The Pension Protection Fund (PPF) has set its levy estimate at £550 million for 2018/19 – 10 per cent lower than the £615 million levy for 2017/18.

The pensions lifeboat has also confirmed that it will implement the majority of proposals that it consulted on in March for the third levy triennium. It has said that the proposals build on the success of the PPF-Experian model for assessing insolvency risk.

Chief among them are the use of credit ratings and the Standard and Poor’s credit model for regulated financial institutions to assess the insolvency risk of certain employers. The PPF has confirmed that it also wishes to ensure that all scorecards are tailored to company size for the PPF-Experian model.

The PPF is also seeking views on a small number of additional proposals including to improve its assessment of scheme underfunding. This involves an ongoing review of the stress factors that are applied to assets and liabilities.

Having appointed Mercer to look at the stress factors, the PPF has said that it will
adopt a different approach to derive the risk factor stresses that are applied to section 179 liabilities.

“Currently the interest rate and inflation rate stress factors are set separately,” explained the PPF in its consultation. “However, as nominal yields can be quite volatile compared to real yields, setting the interest rate and inflation stresses separately can overstate the impact of stressing.

“Section 179 liabilities mirror PPF compensation and are, therefore, significantly fixed in nature (due to the caps on indexation). This in turn
means that underfunding is particularly sensitive to the interest rate stress rather than the inflation stress.”

It has proposed therefore, for 2018/19, to calculate stress factors for real and nominal rates and then use these to set the interest rate stress
factor (equal to the nominal rate stress factor) and the inflation stress factor (equal to the difference between the real rate stress factor and the
nominal rate stress factor).

The PPF has said that if its proposed changes were in place now, then around two in three schemes would have seen a lower 2017/18 levy, with around one in five schemes seeing an increase. SMEs would have seen an aggregate fall in levy of around a third.

PPF general counsel David Taylor said: “When we set out our initial proposals for the next three years we noted the particularly challenging environment in which the PPF is operating. Six months on, a high degree of political and economic uncertainty persists and scheme deficits remain high.

“However, while the risks we face are significant, we’re in a strong financial position and we’re still on track to meet our long-term funding target. As a result, we’re been able to set a levy estimate for 2018/19 that is 10 per cent lower than last year. In doing so we have, as always, sought to recognise levy payers’ desire to limit costs while maintaining an appropriate level of protection given the risks we face."

The PPF will host a webinar on Monday 16 October to explain the detail of today’s announcement and provide an opportunity for levy-payers to ask questions. Further information on how to register for the event will be available shortly.

The PPF will be consulting on the new proposals and the draft levy rules for 2018/19 from 27 September to 1 November.

The consultation document can be found here.

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