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Risk-based levy 'could rise fourfold'

UK - The UK's Pension Protection Fund (PPF) has been criticised for its decision to raise the funding level, at which schemes pay no risk-based levy, from 125% to 140%.

Mike Smedley, pensions partner at KPMG's UK office, has warned: "To illustrate the potential impact, a scheme that is 115% funded on the PPF basis could see its risk based levy rise fourfold - rather than the reduction they might have expected due to their improved funding level."

He argues today's move is bad news for companies with well-funded pension schemes, as the PPF has raised the bar both for paying a reduced levy and paying no levy at all.

KPMG thinks strong schemes may feel they are bearing a disproportionate burden: "Schemes that have taken steps to significantly reduce risk, for example through Liability Driven Investment (LDI) strategies, may feel particularly hard done by as they will get no credit for posing a lower risk to the PPF," said Smedley.

PFF announced this morning the rise in funding level was to ensure schemes pay a levy which more accurately reflects the long-term risk they pose to the PPF, while providing them with an incentive to reduce risk.

In a reaction to KPMG's comments, a spokesman for the PPF told IPE Smedley's figures do not add up.

"If a scheme was 115% funded last year based on the PPF 7800 index we have published on scheme liabilities, had they made no further contributions to the pension scheme, and no adjustments to the investment strategy, they would now be 127% funded and would see a marginal decrease in their levy," said the spokesman.

Consulting firm Punter Southall appears to have reaffirmed the KPMG stance, however, as Jane Beverley, principal, also said:
 
"The hardest hit schemes under the new risk-based levy proposals are schemes in surplus. For example, schemes with assets of 105% of their liabilities will face a levy increase of nearly 14 times. Schemes with assets in excess of 125% of liabilities would previously have paid no risk-based levy, but will now be subject to a levy unless the funding level exceeds 140%,"said Beverley.

Joanne Segars, NAPF chief executive, added while the PPF's attempts to stabilise the three-year levy were positive, there are some concerns, matching those mentioned by KPMG, about fairness towards well-funded schemes.

"The changes made to the levy calculations and the future levy estimates strike a fair balance between keeping costs to a minimum and ensuring the PPF is well-funded and able to pay members' benefits. Over the long-term though, as schemes reduce any funding deficits, the balance between levies charged to well-funded and under-funded schemes must be kept under review. It is important that well-funded schemes should feel they are being treated fairly," added Segars.

In its announcement this morning, the PPF said three main reforms have been made to the levy calculations:

proposed deadlines at which actions taken by pension schemes to improve their funding positions will be taken into account when calculating individual levy bills - a move specifically asked for by industry; raising the funding limits at which schemes pay a reduced levy from 104% cent to 120%, and at which they pay no levy at all from 125% to 140%, and reducing the levy cap from 1.25% of liabilities to 1% of liabilities - this continues to protect the weakest 5% of schemes from disproportionately-high levy bills.

The PPF also said it will keep its levy estimate of £675m in pension protection levies for 2008-2009 stable for the next three financial years, "unless there is significant change in the level of risk faced by the PPF".

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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