UK - Proposals by the Pension Protection Fund (PPF) to halve the cap on the risk-based levy could be seen as a punishment by the other 90% of schemes which are not affected by the change, consultants have warned.

The PPF said the decision to reduce the cap from 1% of protected liabilities to 0.5% will "further ease the burden on more hard-pressed schemes" and protect double the number of vulnerable schemes, from 5% under the previous cap to 10%.

In the consultation document on the 2010/11 pension protection levy - which also confirmed the final levy figure of £720m and a reduction in the levy scaling factor from 2.22 to 1.64 to reflect the decline in scheme funding - the PPF said the average scheme had protected liabilities at 31 March 2009 that were 20% higher than the previous year. (See earlier IPE article: PPF levy remains stable, for now)

The PPF warned if the cap was left at 1% "schemes capped in 2009/10 could see significantly higher bills for 2010/11", while at the same time changes to the levy scaling factor and funding would result in the cap protecting less than 5% of the weakest schemes.

It claimed that to maintain the 5% protection level the cap would have to reduce to 0.8% of protected liabilities, but added: "The Board has recognised pressure on balance sheets in the current environment in proposing its levy estimate for 2010/11. It has therefore considered the possibility of reducing the cap further, to protect more than 5% of schemes."

The PPF noted: "Reducing the cap to 0.5% of protected liabilities would help more of the most hard-pressed schemes. This would increase the proportion of schemes protected to 10% (representing around 1.5% of total section 179 liabilities), at relatively limited cost to uncapped schemes", as the Board suggested a cap of 0.8% would have led to a scaling factor of 1.54.

However, John Ball, head of defined benefit (DB) consulting at Watson Wyatt, said: "The PPF is presenting lower levies for the employers who are struggling most as an act of charity, but the money is going to come from other companies with DB pensions, few of whom are awash with cash.

"After saying it wants levies to reflect risk more closely in the future, it has decided to do the opposite in the short-term. Employers who thought the PPF wanted them to try and maintain their funding levels as much as possible will wonder why they're being punished," he added.

Alan Rubenstein, chief executive of the PPF, pointed out the organisation had delivered on its commitment to keep the levy stable for three years and that it wanted to do more to ease the burden on employers and pension schemes in these "difficult times" by reducing the cap.

He added: "All schemes will pay less than they would have done if we had allowed the levy to rise to reflect the true level of the risk we face."

But Paul Jayson, partner at Barnett Waddingham, agreed with Ball that while the consultation offers short-term help for some schemes, "some of the wider issues will set alarm bells ringing across the industry".

He said: "The most obvious cause for concern "is figuring out how the PPF can possibly remain sustainable in its current form if all schemes are paying less than the amount that reflects their true risk to the PPF."

Jayson argued there will have to be a catch-up at some point and warned if this is left too long when there are less levy-payers around, "the impact on those left standing will be significant".

"Although the reduction in the levy cap will be welcome news to those who will see a significant reduction in their levy other schemes may see it as unfair that they are subsidising the schemes that pose the greatest risk," he added.

Instead, he suggested the only way to reduce the cost of the PPF is "to reduce the level of benefits. This consultation doesn't fill me with confidence and there will currently be some people concerned about the long term viability of the PPF".

Meanwhile, the National Association of Pension Funds (NAPF) described the reduction in the levy cap as a "helpful measure", but it warned, "more remains to be done".

Joanne Segars, chief executive of the NAPF, said: "We are working with the PPF to come up with the right reform of the formula used to calculate the amount that individual schemes are required to pay, so that it accurately reflects the risks posed by each scheme."

The consultation closes to submissions on 11 November 2009.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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