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PPF chief provides detail on risk-based levy

UK – Lawrence Churchill, the chairman of the Pension Protection Fund, has provided some more details about the criteria for the launch of the much-discussed risk-based levy next year.

The fund levy, which will be at least 80% risk-based, is only one of the four levies that will help finance the PPF, but has so far been at the centre of debate about its impact on the future of defined benefit schemes in the UK.

Speaking at a conference organised by the Association of Corporate Treasurers, Churchill said the PPF proposes to replace the current flat-rate levy in April 2006. The flat rate in the meantime will have raised about £130m (€194.5m)

The risk-based levy is going to be determined by the members of the PPF’s board every year. Churchill said the PPF proposes to base it on funding and insolvency risks, as well as using “fairness, simplicity and proportionality”.

Quantifying the funding risk would involve calculating the difference between protected liabilities and scheme assets. The insolvency risk would be grouped in bands “for simplicity”.

Churchill recommended that companies check their ratings are up to date and respond as quickly as possible to the PPF’s consultation on the risk-based levy. This is due to be published in about two weeks time.

He also encouraged defined benefit schemes to prepare so-called S179 valuations, which are instrumental in calculating the risk-based levy.

Francis Fernandes, head of actuarial at ABN Amro, told delegates that said DB trustees could involve banks in preparing the new funding.

Former Lane Clark & Peacock consultant Fernandes observed that trustees are set to get greater powers to accelerate funding into company DB schemes, but trustees of under-funded schemes must also gear up for dealing with the Pensions Regulator.

When the regulator demands higher contributions against the PPF target, and employers struggle to step up contributions, Fernandes said that a contingent funding solutions, like a letter of credit, could be the answer.

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