PPF levy open to abuse, could work against schemes, says Aon Hewitt

UK - Aon Hewitt has warned that proposed changes to the Pension Protection Fund (PPF) levy could end up working against pension funds.

The consultancy, which finalised its merger last week, warned that the new levy formula, which will see the levy set for three years, could hurt pension funds that have already taken steps toward reducing their risk.

Lynda Whitney, principal consultant at Aon Hewitt, said: "Once again, the PPF has moved the goal posts for schemes that have already acted to lower risk.

"Under the new proposals, a low-risk scheme with a Dunn & Bradstreet risk and insolvency score between 97 and 100 will now pay a risk-based levy that is more than five times the expected cost of claims."

John Belgrove, also principal consultant, warned that the system was open to abuse if not monitored carefully.

He said taking stock of a scheme's asset strategy was a step toward a fairer levy, as schemes with a riskier investment strategy were more likely to be underfunded if their sponsoring company were to collapse.

"So, although the aim is sensible, the measurement methodology may be open to abuse, particularly for sub-£1.5bn liability schemes," Belgrove said.

"Schemes could take less risk at the point that asset measurement occurs in order to get a lower levy."

He added that schemes could possibly invest in cash and futures, but, in absence of a stress test on derivatives, the lower levy would apply.

Milan Makhecha, a senior consultant at Aon Hewitt, added that the abolition of the 100 bands of D&B - replaced instead by six scores - could result in schemes having to avoid big cliff edges.

Chris Atkin, managing director at Atkin & Co, went one step further and called for the abolition of all bands, saying that instead funds should all see the same levy applied, regardless of their credit rating.

Atkin argued that this could lead to cost-savings on part of the PPF and would remove the temptation for companies to "massage" their ratings.
 
Belgrove concluded that these factors would offer a new challenge for the PPF as it attempted to provide a fairer levy.