The UK’s defined benefit (DB) lifeboat fund has dropped its multi-year approach to fixing levy rules for reasons including uncertainty about the economic fallout of the coronavirus pandemic.
Instead, the Pension Protection Fund (PPF) today issued a consultation only on how it will set the levy for the next year – 2021/22.
It said its strong financial position at the start of the pandemic had meant that despite the risk of increased claims, it had been able to avoid proactively increasing the levy.
“This, together with an update in the way scheme underfunding is calculated and the proposals being put forward to support schemes in the coming year, means that the amount of levy the PPF expects to collect will drop to £520m in 2021/22,” it said.
This is £100m less than what it is seeking to raise for the 2020/21 levy year.
The proposals aimed at helping pension schemes and employers with the cost of the levy are twofold:
- Reducing the uncapped risk-based levies for smaller schemes, starting with those with less than £50m in liabilities and reaching a 50% cut for those with less than £20m; and
- Cutting the risk-based cap from 0.5% to 0.25% of stressed liabilities.
On the impacts of COVID-19 on levy bills, the PPF said it expected these to be limited for 2021/22.
‘Substantial’ insolvency score effects in 2022/23
However, as government support schemes come to an end and notwithstanding considerable uncertainty, “we expect an increase in the level of insolvencies and a significant increase in claims on the PPF,” the lifeboat fund said.
The insolvency risk model the PPF uses to score the majority of employers uses accounts information filed with Companies House, and the lifeboat fund said that for most sponsors the main effect of accounts covering the period of COVID-19 will be seen in 2022/23 levy invoices.
“At that point, however, the effects could be substantial – with many employers seeing a worsening in their levy score. All else being equal this would lead to a rise in levy bills,” the PPF said.
The PPF also said departing from proposing rules for a three-year period would allow it to make an active choice on the level at which the levy was set in 2022/23, when it would have more clarity on what the impact of the COVID-19 pandemic has been on its funding position, it said.
“The current environment makes setting an appropriate level for the levy particularly challenging,” said David Taylor, executive director and general counsel at the PPF. ”There is significant uncertainty about how claims and risks will develop so we’ve moved away from a multi-year approach to setting the rules.
”In time, we’ll need to consider what further steps to take to ensure an appropriate levy in 2022/23 and beyond, alongside our review next year of the PPF’s funding strategy,” he added. ”But for now, we believe the changes we’re proposing for 2021/22 will provide valuable support to the schemes and employers.”
Lewys Curteis, associate at Barnett Waddingham, said the PPF had taken “a sensible and pragmatic stance […] in such a period of uncertainty”.
A spokesperson for the pensions regulator said it welcomed the levy measures announced by the PPF.
“During these difficult times, we and the PPF are having to balance member security and affordability in order to support schemes and their sponsoring employers,” he added.
“This will remain a difficult challenge in the months ahead given the present level of economic uncertainty but we are working with the PPF to maintain the appropriate balance to protect savers.”