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Levy increase 'no surprise' after six-fold deficit increase

UK - A predicted 25% increase to the levy of the Pension Protection Fund (PPF) should come as no surprise in light of low gilt yields, a spokesman for the UK lifeboat scheme has argued.

Speaking after consultancy Towers Watson warned that the charge levied on insuring defined benefit (DB) schemes within the mandatory system would rise by a quarter, the spokesman said this was due to the revised levy framework requiring average asset and liability values over a five-year timeframe.

The spokesman said that, come 2013-14, the previous rates from 2007-08 would no longer be employed, but replaced with the values dating from 2012-12.

“The lower yields over this new averaging period will result in larger deficits among pension schemes and, therefore, higher levies because the greater risk they pose to us, the more they pay,” he added.

According to the PPF 7800 index, aggregate DB scheme deficits stood at £267bn (€331bn) at the end of June, down from an all-time high of £312bn in May.

The spokesman insisted that the averaging of values would make the levy “more stable and predictable”, which had been a demand made by the PPF’s stakeholders when it developed the new framework - with any increase capped at 25%.

“If we did not average values over five years, our calculations would be based on short-term market movements, leading to greater volatility in levy bills,” the spokesman said, adding that the “implications” for the 2013-14 levy would be clear during a consultation launching in September.

However, DB schemes concerned about the impact of the new levy should be proactive in tackling the risk, Aon Hewitt said.

Milan Makhecha, principal at the consultancy, said a “significant” reduction could still be achieved by managing the credit ratings used to establish the PPF’s charge - the Dun & Bradstreet (D&B) failure scores.

“In our experience, it is not uncommon for small increases in D&B scores to lead to reductions of around 50-60% in PPF levies,” he said.

Makhecha added that the protection fund was faced with the “dilemma” of accepting what would be a “windfall” due to the low gild yields or changing the formula only agreed last year.

“The problem for companies is that they may not know what the PPF decides to do until September,” he said.

“This may be too late for some, given that the PPF takes a 12-month average of D&B failure scores for the levy calculation, but many UK companies still have time - if they act fast - to understand their credit rating and act to improve it.”
 

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