Out-Law News 3 min. read
26 Sep 2012, 5:04 pm
The proposed figure is the same as the ultimate contribution made by businesses for 2012-13; however, is £80m more than what the PPF originally estimated that they would pay over the same period. Business leaders commented that the rise was better than anticipated, with the CBI saying that it had expected the PPF to increase the charge by the full 25% allowed by law.
Announcing this year's estimate, PPF chief executive Alan Rubenstein said that pension scheme funding had "deteriorated significantly" over the previous eighteen months, to the point that claims made this year had already exceeded the Fund's annual levy.
"It should come as no surprise that this level of heightened risk would ordinarily result in a substantial increase in the levy estimate, up to the maximum permitted, particularly as our levy framework is designed specifically to respond to changes in risk of this nature," he said. "However, we are realistic and have listened. We know that many employers are still struggling in the continuing economic turmoil. That is why, exceptionally, we have set a levy estimate that means schemes will typically see levies at similar levels in 2013-14 as they will for this year."
Final confirmation of the levy will be announced in December, he said, alongside the results of a consultation process (38-page / 455KB PDF) on the PPF's determination. The PPF intends that the formula it uses to calculate the levy will remain broadly unchanged until its next three-yearly review.
The pension protection levy is paid by eligible defined benefit pension schemes, which are schemes that 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.
The CBI had previously called on the PPF to change the calculation it used for the levy, which is based on the average of gilt yields over the previous five years. Yields from gilts, or Government bonds, have fallen dramatically since the 2008 financial crisis; the period before which has now fallen out of the PPF's calculation for the first time. The business body said that it acknowledged that the PPF's decision was a "one-off move ... in light of the UK's difficult economic position".
Businesses and pension funds welcomed the announcement, with Joanne Segars of the National Association of Pension Funds (NAPF) saying that the estimate "struck a balance" between the interests of struggling businesses and ensuring the PPF remained sustainable.
"These are difficult times for companies running final salary pension schemes with low interest rates piling significant pressure on already stretched scheme deficits," she said. "We welcome the PPF's pragmatic decision to limit any increase in the levy to no more than it is collecting this year. While any increase at the current difficult time is unwelcome, it does reflect that the risks to the PPF have increased. The rise would have been more had it not been for the PPF's approach."
Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, agreed that the estimate reflected a "pragmatic approach" by the PPF. However he pointed out that future levies would have to "remain credible", which could mean future rises as the risks and liabilities attached to defined benefit schemes increased.
The estimated combined deficit of the nearly 6,500 schemes tracked by the PPF stood at £280.3bn as of the end of August, according to the latest monthly PPF 7800 Index. Although this figure was a slight decrease on the £283bn deficit recorded at the end of July, Rubenstein said that future levy increases were "inevitable" if the current high risk conditions persisted.
"People should bear in mind that, if our protection regime in the UK is to be credible, then it needs to be funded," he said. "The alternative, an inadequately resourced PPF, would fail to offer the security that pension scheme members deserve and would strengthen the hand of those who argue for more radical measures to deal with risk."
