UK - Actuaries and consultants firm Barnet Waddingham has called on the Pension Protection Fund (PPF) to change its levy calculations to reflect defined benefit schemes paying cash benefits to its members.

John Cormell, an actuary at the firm, argued the current methodology is incorrect and unfair for such schemes, as the calculations do not reflect the true value of liabilities.

"Part of the PPF's levy calculation involves them updating the latest MFR or S179 liabilities by applying a ratio of annuities to reflect changes in market conditions," said Cormell.

"However this approach is nonsense when applied to liabilities in respect of cash benefits as it does not apply to cash," he added.

Cormell said the effect varied from scheme to scheme, but the impact in some cases can be huge.

"In one case, including a ratio of annuities in this way increased the 2007/08 levy by over 400%," he claimed.

Cormell believes the PPF could easily change the methodology but criticised its hesitance to do so.

"Whilst the PPF has reluctantly acknowledged the problem, it says it does not have discretion to depart from standard methodology. However, it need do no more than simply omit a ratio of annuities in the roll of liabilities. The rest of the calculation can stay the same. This adjustment is very easy to do but the PPF does not like changing its methodology even where it has an unfair impact," he argued.

He went further and said he was surprised at the PPF's reluctance to redraft the way it views schemes, stating: "Given that some sections of the industry and government are proclaiming cash benefit schemes are the ‘schemes of the future', it is surprising that the PPF is insisting on treating them like traditional pension funds," he said.

His comments also follow figures from the PPF earlier this week suggesting nine out of 10 UK defined benefit schemes were in deficit in February to the tune of £218.7bn (€237.3bn), based on its own calculations.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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