The Pension Protection Fund (PPF) has published a consultation on halving the levy it charges to sponsors of defined benefit (DB) pension schemes. Under the proposals, the levy would be cut from £200m this year to £100m next year.
This is a part of PPF’s Long-Term Funding strategy published last September which saw the levy cut from £390m in 2021 to £200m in 2022.
PPF’s key proposals are:
- Setting the 2024/2025 levy at £100m;
- Setting the levy scaling factor at 0.40 (up from 0.37 this year);
- Changing the scheme-based levy multiplies from 0.000019 to 0.000015;
- Leaving the risk-based levy cap at 0.25% of scheme liabilities.
Introducing the consultation, executive director and general counsel David Taylor said that PPF’s governing legislation places limits on how much can be charged and the extent to which the levy can be increased from year.
He said: “This is 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 £100m in future years.”
Taylor added that if the PPF’s legislative framework was to change, as has been suggested in the recent Department for Work and Pensions (DWP) review of the PPF, the fund would reconsider its approach.
He continued: “In the meantime, it is essential we charge a levy and retain the ability to manage our risks within the current legal framework.”
Taylor added that a “small increase” in the levy scaling factor is needed to achieve a levy of £100m in 2024/2025 but he expects almost all levy payers to see their levy fall compared to the current year.
“However, because we anticipate 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 £100m in future years,” he noted.
The consultation will close on 30 October.
Constrained
Steve Webb, partner at LCP, said that while the proposed cut in the levy is welcome, it is “clear” that PPF would like to go further but is “constrained by the law”.
He said: “It is highly undesirable that the 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.”
Webb said that the PPF is prevented from increasing levy in future by more than 25% in any one year. This rule, he said, means that if the PPF thought it no longer needed a levy and set it at zero one year, it would be unable to reinstate the levy.
“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,” Webb added.
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