DB schemes urged to prepare for potential future PPF levy increases

Defined benefit (DB) pension scheme sponsors and trustees must be aware that their Pension Protection Fund (PPF) levy could undergo a “very large increase in the future", according to Barnett Waddingham (BW).

A blog post from BW associate and corporate actuary, Lewys Curteis, pointed out that the levy is calculated through the generation of an ‘insolvency score’, which is calculated from publicly available information and is intended to illustrate the risk of a scheme’s sponsoring employer falling into insolvency.

He added that one of the consequences of the pandemic would be worsening financial results from sponsors’ annual accounts, potentially leading to increases in the levy.

Analysis performed by Dun & Bradstreet, which generates most sponsoring employers’ risk component, has indicated that 50 per cent of companies were likely to drop levy bands, with an average drop of two levy bands.

This could increase levy costs for schemes by between 25 per cent and 140 per cent.

Curteis added that the effects of the pandemic on the PPF levy were not expected to be fully felt until the invoicing of the 2022/23 levy in autumn 2022, while he also noted that the calculation for the levy fee may be changed in the near future if the lifeboat “believes the deterioration in insolvency scores does not accurately reflect the underlying risk”.

He stated that this was very likely to depend on the number of pandemic-related insolvencies that the PPF is forced to deal with in the coming months.

To be on the safe side, BW recommended that schemes reviewed the impact of any new financial information on their insolvency risk scores before submitting it for public consumption, while also considering whether they can take actions to mitigate anything that could result in levies rising.

The PPF published a consultation on levy rules for 2021/22 in September, with this including a proposal to halve the levy for schemes with less than £20m in liabilities as it said setting an appropriate level for the levy was "particularly challenging" considering the circumstances.

Many of these proposals, including the halving of the levy for small schemes, were approved in December after being "overwhelmingly supported" by industry stakeholders.

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