UK - Pensions consultants have warned the new Pension Protection Fund (PPF) levy to be charged on UK pension funds in 2008/09 will effectively leaving pension fund "running to stand still" because of the unexpectedly high increase in fees.
The PPF announced earlier today the scaling factor pension funds use to work out their pension protection levies has been set at 3.77 for next financial year, and is said by the government body to be set based on data supplied by March 31 on employers, funding levels and the direct action they have taken to reduce the risk on their schemes.
However, PPF officials said even though it has been a turbulent year for pension funds, it has set the levy to make sure they achieve the funding requirement this quasi-pension fund needs to meet its own funding target.
"When working out this year's scaling factor, we had to take account of the significant volatility we have seen in scheme risk during the last 12 months - and make sure that we still collect the £675 million we said we need to collect," said Partha Dasgupta, chief executive of the PPF.
"In the short-term, we have seen scheme funding and insolvency probabilities improve. But, it is long-term risk that we have to protect ourselves against, particularly as we are now in the middle of a credit crunch which can only mean a lot more uncertainty for the future."
Consulting firm Watson Wyatt is highly critical of the PPF as a result of this latest revelation, and points out new levy is twice the level they would have anticipated for next year and therefore leave pension schemes under even greater pressure to meet funding needs of their own pension schemes.
John Ball, head of UK defined benefit consulting, said: "Employers who have taken steps to reduce risks in their pension schemes will feel that they are running to stand still. Companies have paid money into their pension funds and taken steps to improve their insolvency ratings in order to keep their levies down. Now, they find that the PPF has moved the goalposts and they will have to pay more than they thought. Pension schemes have become the latest victim of the credit crunch, with the PPF suggesting it needs to build up a war chest before things get worse."
He continued: "Some people will want to make sure they are sitting down when they open their letters from the PPF. The size of the invoices will make people wonder how the PPF got things so wrong to begin with."
Jeremy Dell, partner at Lane Clark & Peacock, described the PPF's inability to correctly estimate the scaling factor six month as an example of "sheer incompetence".
"Apart from very well-funded schemes or those with a very good D&B score, most schemes will see their PPF levies set far higher than expected, owing to the PPF's sheer incompetence in forecasting the scaling factor with any degree of accuracy," said Dell.
"The even more worrying message to come out of today is that for the foreseeable future, few are likely to believe future individual scheme levy predictions, making planning impossible."
KPMG pointed out the PPF effectively underestimated the PPF levy requirement by £300m in November, while Aon Consulting calculated the new sum as being a 236% increase for pension scheme payments or nearly 2.5 times more than they expected.
According to Watson Wyatt, a scheme with £100m (€125m) of PPF-protected liabilities, £105 million of assets and a D&B failure score of 80 (which corresponds to a 0.3% probability of becoming insolvent within one year) will receive a levy invoice of £161,268 in 2008/09 whereas under the indicative formula published by the PPF in November, this would have been £76,640.
Even this figure was a significant leap, according to Watson Wyatt, as that same scheme would have paid £20,446 last year.
In setting the scaling factor, the PPF calculates each scheme's individual levy - based in part on the risk levy, and then compares the total of all individual scheme's levies with what it needs to collect, and ‘scales' the total figure accordingly.
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