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New PPF formula could double levy for some schemes, warns Barnett Waddingham

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UK - More than one in five UK pension funds face a doubling of the levy it pays to the Pension Protection Fund (PPF), Barnett Waddingham has warned.

The warning came after the PPF published its Levy Policy Statement for 2011-12 which, as already announced, would see the fund aim to collect £600m (€709m) in total fees, a reduction meant to take into account the switch from the retail price index (RPI) to the consumer price index (CPI).

An associate at Barnett Waddingham has warned that despite the reduction in overall levy, some schemes will see a drastic increase due to the way the risk-based levy is now calculated.

"The levies charged to some schemes will be much higher than last year, with 22% of schemes seeing an increase of more than 50%," said Ben Roach

He added: "Companies with high failure scores will be most affected as the PPF's assumed probabilities of insolvency have more than doubled for the strongest companies.

"The probability of insolvency is a direct input into the levy calculation and so a doubling of the insolvency probability means a doubling of the risk-based levy."

Roach said schemes may want to reconsider their options for reducing levy payments before March next year, with deficit reduction contributions and the use of contingent assets mentioned as a possible deficit reduction measure.

Contingent asset deals have become increasingly popular over the last few years, with the PPF's Purple Book showing that nearly 600 contingent assets were employed to reduce levy payments in 2009/10, lowering payments by £100m (€114.3m) in that financial year.

Other recent examples include drinks giant Diageo's use of maturing whisky to plug a £862m deficit.

Meanwhile, new figures revealed that the overall deficit for schemes in the PPI has fallen to £1bn in November this year, down from £53.5bn 12 months ago.

The news meant that the 6,500 schemes now had a coverage ratio of almost 100%, reaching 99.9%.

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