Out-Law / Your Daily Need-To-Know

New rules set pension protection levy at reduced level for next three years

Out-Law News | 23 Sep 2011 | 9:29 am | 2 min. read

The levy paid into a special fund by pension schemes to pay compensation to their members should the scheme go insolvent has been reduced for the next three years, the fund organisers have announced.

The Pension Protection Fund (PPF) announced that the levy would be capped at £550m a year from 2012/13 - £50m less than the amount needed to fund the scheme this year. This is the second cut to the total levy in two years, according to PPF figures.

The PPF is also consulting on the new framework it will use to calculate the total amount charged to pension schemes, which will come into force in 2012/13. The rules will be fixed for three years instead of changing every year as was previously the case, meaning that the bill to individual schemes will be more predictable and will fall if the risk to the scheme is lessened, the PPF said.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, welcomed the levy reduction and the new rules, which he said would consider the impact of risk to pension schemes on the amount charged for the first time.

The pension protection levy is paid by eligible defined benefit pension schemes, which promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. It is used to fund compensation paid by the PPF to people whose employers have become insolvent, meaning they can no longer afford to pay the pensions they promised.

Under the new rules, investment risk will be taken into account in what individual pension schemes are charged for the first time. The largest schemes, which hold assets of more than £1.5bn, will need to provide the PPF with additional details about the type of investments they have made with their assets. Smaller schemes will also be able to do so if they wish.

The new rules will be used for three years rather than being reassessed every year to ensure "stability and predictability" for the schemes funding the levy, the PPF said. Using the same rules means that if the risk to a scheme's investments falls, the amount of levy it will be charged will also fall.

However pensions expert Tyler warned that assessing the impact of the risks to their investments on the amount they will have to pay may cause employers and trustees some uncertainty when calculating payments under the new rules for the first time.

"Of concern is the effect that this change will ultimately have on investment strategies. Although the PPF does not 'seek to influence' this area, trustees may find themselves under increased pressure to move away from equities and into less risky investments," he said.

"The overall levy reduction and the setting of the levy rules for three years are both welcome developments. However, it is worth bearing in mind that the adoption of the new levy framework will initially bring some uncertainty."

Alan Rubenstein, chief executive of the PPF, said that the reduced levy would protect employers and pension schemes while ensuring the scheme itself was adequately funded.

"We are also delighted that we can finally put in place the rules for our new levy framework which enable schemes to plan for their levy bills for the next three years. I would also encourage schemes to take risk reduction measures as they have a direct impact on the amount of levy they pay," he said.

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