UK - Introducing investment risk as a factor in calculating the Pension Protection Fund (PPF) levy will not have a "significant effect" on pension schemes' investment strategies or on asset prices, the PPF has claimed.

The organisation has today issued a consultation on the new design of the PPF levy - which aims to be "more tailored" to the individual risk that schemes pose to the fund - and will consist of calculations of long-term risk, analysis of short-term risk and a scheme-based component.

It said the two key features of the new levy would be:

Assessing the probability of a scheme's sponsoring employer going bust during a five-year period - in addition to a separate assessment of the chances the employer will collapse in a one-year period Taking into account the risk that a scheme's investment strategy poses to the PPF when calculating its individual levy (See earlier IPE article: PPF to include investment risk in new levy)

The PPF added while implementing investment risk as a levy factor "might be expected to incentivise schemes to reduce the level of risk in their portfolio to lower their levy", it claimed analysis had suggested "levy changes will be small in comparison with the additional return expected from return-seeking assets". 

"For this reason we do not expect a significant effect on schemes' investment strategies or, therefore, on asset prices" stated the consultation.

The PPF acknowledged "significant changes of the type proposed should be introduced in a measured way" to allow schemes to respond to the changes, and revealed initial discussions with stakeholders have resulted in the majority favouring implementation in 2011/12, although this is one of the points open to consultation.

Partha Dasgupta, chief executive of the PPF, said: "Our levy payers have given us a strong message that the current system does not differentiate enough between schemes - and that levy bills should be less volatile."

"The proposals will change the distribution of the levy among schemes to more accurately reflect the risks that we face - there are a similar number of schemes that will pay more as will pay less."

Research outlined in the consultation document suggested half of schemes would see a higher levy, as "one in six pay a bill up to a quarter higher, with just over one in 10 seeing their bill double".

It added: "While this will clearly be unwelcome, we consider that such a re-allocation in bills brings them more closely in to line with the risks that schemes pose to us.  It is also the case that in general these are schemes that still pay a low levy compared to the size of scheme (i.e. as a proportion of liabilities)." 

That said the PPF claimed the new formula will mean fewer schemes pay either very small or very large levies, instead 70% will pay between 0.04% and 0.5% of liabilities, compared with just 52% of schemes under the existing calculations.

The consultation will close to responses on Friday 13 February 2009, which will subsequently be followed by policy statement setting out the view of the PPF board.

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