The Pensions Protection Fund (PPF) has recently consulted on keeping the levy at £100m for 2025/26, claiming that it is restricted from reducing it further by legislation, however consultancy WTW argues the levy could be lowered further.
In the consultation published in September the PPF said that in the absence of legislative constraints it would bring the levy to zero, only re-introducing the levy in the event of a significant challenge to its funding position. It has therefore decided to keep the levy at £100m for the following year, while it engages with the government on legislative change to enable the levy to be reduced further.
However, Edward Russell, director of retirement and actuarial at WTW, and Mark Dowsey, director at WTW, argued that the levy should be no greater than £60m.
The duo acknowledged that the legislation, as was drafted more than 20 years ago, reflected the state of schemes in the PPF ‘universe’ at that time. However, they pointed out that the position is very different today.
In the ‘Purple Book’ of 2006, the first year of publication, 83% of schemes were in deficit with an aggregate deficit of £76bn. In 2023, more than 80% of schemes were in surplus and the aggregate surplus was nearly £360bn.
Russell and Dowsey also argued that the existence of the PPF’s £13bn surplus and 166% funding level supports the view that no levy is necessary for 2025-26 at all.
“The £100m, therefore, represents an unnecessary drain on scheme and sponsor resources – resources that could otherwise be helping to grow businesses and boost the economy,” they argued.
Both this and last year the PPF claimed that it is restricted from lowering the levy further by legislation. It has also claimed this year that it is “paramount” that it retains its “operational independence and the ability to respond to a future change in funding”.
However, the WTW’s duo argued that the restriction is “not a restriction at all”, adding that at best it is a “hurdle” that could be “easily” overcome.
They explained: “In anticipation of a need for some wriggle room, the Pensions Act contains a provision that would allow the government to amend the 25% figure by Order of the Secretary of State. Such order-making powers are common in pensions legislation – revaluation orders and even the levy ceiling order are examples. These are made routinely (annually in the two examples) and easily. They can also be made quickly.”
Russell and Dowsey said there is also an additional step needed first as the provision to vary the percentage is currently not ‘in force’, so an additional commencement order would have to be made. However, they claimed it could easily be achieved.
They believe that the PPF’s need for operational independence suggests it “does not trust the government” to make such orders when needed, but according to Russell and Dowsey, it is highly unlikely that the government would “risk the PPF ‘Lifeboat’ sinking with its 292,000 members onboard”.
Even if the PPF does not trust the government, the duo suggested the fund could still lower its levy.
They pointed out that since the PPF consulted in 2023 to bring the levy to £100m its surplus has grown by £1.1bn, and given the growth in the PPF surplus the duo claimed that if £100m was needed then, less is needed now.
Russell and Dowsey explained that £100m, with 25% per annum increases, over five years would grow to £821m.
“Therefore, given the surplus has already grown by that amount and more, could the PPF not afford itself an extra five years to get back to £100m?,” they asked.
Adding that based on the 25% increases each year, this would suggest a levy of £41m, not £100m.
A PPF spokesperson told IPE in an email: “We’re grateful to WTW and all respondents to our recent consultation on next year’s levy. We have clearly heard the concerns raised and can reassure that we don’t want to charge the levy for any longer than is needed. We’ve long highlighted that legislative changes are required to give us greater flexibility on the levy – we’d welcome these to be made at the earliest available opportunity. We’ll continue to actively engage with ministers and officials in DWP on this and are conveying the growing strength of stakeholder concern. We do though recognise the need to balance the interests of both levy payers and members, particularly given member calls for improved pre-97 inflation protection. We are carefully considering stakeholder responses and will communicate our decision in the near future.”
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