PPF consults on plans to halve its 2024/25 levy

The Pension Protection Fund (PPF) has launched a consultation on its proposed 2024/25 levy rules, revealing plans to cut the 2024/25 levy estimate to £100m, half of the 2023/24 level.

The consultation is also seeking views on the options to maintain a levy of £100m in the longer term, given current legislative constraints on the PPF's ability to cut the levy without damaging its ability to respond to a funding challenge should one arise.

The PPF’s Annual Report recently showed that the lifeboat is in a very strong financial position, having previously cut the levy from £390 million in 2022/23 to £200 million in the current year.

The latest cut to the levy continues this trend, meaning that the lifeboat has cut the levy by almost 85 per cent since 2020/21, with almost all levy payers are expected to see their levy fall compared to the current year.

For the 2024/25 year, the PPF confirmed that it intends to increase the Levy Scaling Factor (LSF) slightly 0.40, and the scheme-based Levy Multiplier (SLM) will change to 0.000015, while the risk-based levy cap is set to remain at 0.25 per cent of scheme liabilities.

Further cuts are unlikely, however, as governing legislation places limits on how much can be charged and the extent to which the levy can be increased from year to year, which also limits how much the PPF can allow the levy to fall without damaging its ability to respond to a funding challenge should one arise.

Given this, the PPF confirmed that it is aiming to ensure the levy remains at or above £100 million in future years, acknowledging that, as the number of schemes paying a risk-based levy would otherwise continue to decline, more substantial changes are likely to be necessary to maintain a levy of £100 million in future years.

The consultation stated: "The simplest option is to continue to increase the levy scaling factor. However, if bond yields remain at their current levels, we would expect the proportion of schemes paying a risk-based levy to fall.

"Due to the legal requirement that at least 80 per cent of the levy is risk-based, this means that most of the levy burden would fall on a minority of schemes. We believe it more appropriate to try and spread the levy burden across more schemes.

"We also consider that it would be reasonable to bring the reasons for charging a levy and the way it is distributed more into line. To achieve these aims we have considered different options including the inclusion of an additional factor which would scale-up a scheme’s liabilities or increasing stress factors."

However, the PPF confirmed that it would reconsider the approach to future levy estimates if the legislative approach was to change, as was suggested in the recent departmental review of the PPF.

The final rules for the 2024/25 levy year are set to be published in December 2023, along with the PPF's policy statement which finalises its proposals for change following feedback to this consultation.

PPF CEO, Oliver Morley, commented: “We were pleased to report another successful financial year in our Annual Report, and this has now been reflected in our proposal to further reduce the levy by half, taking the levy estimate down from £200m in 2023/24 to £100 million for 2024/25.

“The current legislation was intended to protect levy payers from sharp increases in the levy; however, it also effectively constrains how low we can allow the levy to fall without damaging our ability to respond to a funding challenge should one arise.

"We therefore plan to ensure the levy remains at or above £100 million in future years.”

However, industry experts have encouraged the government to make the legal changes necessary to support further cuts, with LCP partner, Steve Webb calling for a change in the law to give PPF greater flexibility.

Webb stated: “The PPF is a success story and its finances are now in robust shape.

"Whilst a proposed cut in the levy on employers from £200m to £100m is obviously welcome, it is clear that PPF would like to go further but is constrained by the law.

"It is highly undesirable that PPF Is being forced to charge employers more than it needs to, simply because of the lack of flexibility to increase the levy again in future if needed.

"The government should change the law to allow deeper cuts now, which would be a boost to British industry without undermining the funding position of the PPF”.

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