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Five-fold increase in PPF levy

UK - The average UK pension schemes could see their annual Pension Protection Fund (PPF) levy at least double compared with last year while some schemes will see it rise five times higher than in 2006.

Changes have been made by the PPF to the levy scaling factor, to place greater emphasis on a fund's risk-based element of the levy rather than on the scheme's PPF liabilities.

The PPF announced in December 2006 it would need to increase the levy from £300m (€440.5m) to £675m in the coming financial year.

So under the new system, 20% of the annual invoice is allocated to cover the scheme-based levy while 80% is risk-based to the scheme and set according to how much the scheme is under funded.

The PPF admits this latest total levy bill is calculated without considering whether schemes have sought to take direct action to reduce their liabilities because full information is not yet available.

It has instead based the latest levy scaling factor calculations on a larger sample of schemes than it did last year and says the quality of the data is expected to improve once all schemes have provided full valuations next year.

This is important as the 80% risk-based levy is calculated to take into account any recent deficit repair contributions, along with the employer's insolvency risk and the impact of other contingent assets put in place to support the scheme set up in April 2005.

Schemes more than 125% funded, on a PPF basis, are exempt from the risk-based levy and the risk-based levy is also capped at 1.25% of liabilities to protect the weakest schemes.

However, Stephen Yeo, senior consultant at Watson Wyatt, is warning some pension schemes will have to contribute up to five times more in 2007/2008, while riskier schemes will actually see their levy capped at two and half times the level paid in 2006.

"There are 10-11,000 schemes covered by the PPF and they cap the levy for 5% of the funds. But if you are not capped, you are likely to be in a scheme which could see a big increase," said Yeo.

"Some of those who have liabilities will drop into the PPF as a result of this, because it has been expressed as the equivalent of paying for fire insurance once your house is on fire," he added.

Watson Wyatt also argues as levies have more than doubled even lower risk schemes will see their bills increase because they are effectively supporting the weaker pension funds.

"The system of levies still contains significant cross-subsidies, with the schemes of strong employers are being forced to pay for the benefits in schemes of weaker employers," adds Yeo.

Yeo argues the PPF does have the powers to reduce its own liabilities by reducing member benefits but is unlikely to enact these powers because it would reduce confidence in the programme.

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