PPF confirms 'significant reduction' in 2023/24 levy

The Pension Protection Fund (PPF) has confirmed a “significant reduction” in its levy for 2023/24 after receiving broad support for its proposed changes to the 2023/24 levy rules, with 80 per cent or more of responses supporting each proposal.

As a result of the proposed changes, almost all (98 per cent) schemes are expected to pay less levy next year, with changes to the levy rules expected to cut the levy to around £200m for 2023/24, down from £620m in 2020/21 and £390m for 2022/23.

Specifically, the lifeboat confirmed that it will push ahead with plans to reduce the increments between levy bands in an effort to “significantly reduce” volatility in levies, also cutting the risk-based levy scaling factor by 23 per cent and the scheme-based levy multiplier by 10 per cent.

Measures introduced in 2021/22 to support schemes through the pandemic with flexibility on payment terms will also stay in place.

Alongside this, the PPF said that it received strong support on proposals to integrate new asset class information being collected by The Pensions Regulator into the levy in 2023.

Although the consultation responses also highlighted concerns as to whether the recent extreme market movements would require PPF to revisit the proposed stress factors for some asset classes, the lifeboat argued that the recent market movements will not impact funding strategy or proposed asset stresses, as these take a long-term view of risk and are not guided by short term volatility.

Looking ahead, the PPF revealed that the majority of respondents were supportive of the proposed direction of travel in relation to the PPF’s priorities for developing the levy methodology in the longer term, confirming that the lifeboat will be using the industry feedback to inform its future approach.

In response to concerns over whether the PPF could shift the burden to larger schemes, for instance, the policy statement emphasised that the PPF remains committed to making the risk-based levy is risk-reflective, in an effort to ensure that schemes with weaker sponsors continue to pay more per pound of underfunding.

It stated: “We remain strongly committed to the principle that schemes that pose more risk, should pay more levy and this will continue to inform our thinking as we develop our future proposals.

“However, we remain of the view that it is right to reduce the sensitivity of the levy to changes in insolvency risk (and as a result increase the emphasis on underfunding risk). This supports a move to a simpler levy – important as the overall value of the levy falls – and, critically, addresses volatility in material levy bills.”

In addition to this, the PPF suggested that seeking legislative change to increase flexibility in relation to setting the levy estimate will be a priority for the lifeboat, after receiving “strong support” from the industry on this proposal, with two respondents stating that they would prefer the levy to be decreased as quickly as possible.

Respondents also highlighted an interest in the use of potential excess reserves in the future, although the PPF confirmed that this is an issue for government, as the Pensions Act 2004 is “silent” on what would happen to any PPF excess reserves, and would likely require legislative change.

Despite this, the policy statement acknowledged that there are a variety of stakeholder views on this issue, confirming that PPF will share the feedback received from all stakeholders with the Department for Work and Pensions.

Commenting on the changes, PPF chief executive, Oliver Morley, stated: “We are pleased to announce that next year’s levy will be reduced by almost half. The industry has told us our proposals are sensible and welcome at a time when there are many financial pressures on employers.

“It is excellent news that as a result of our strong financial position, and the current level of perceived risk posed to the PPF, we can actively reduce the levy while still ensuring a positive and secure outcome for our current and future members.

“We are very grateful for the feedback on our proposals for next year’s levy rules and the helpful insights which will continue to inform the development of future levy methodology.”

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