Total annual pension protection levy on employers to fall as new risk measurements come into force

Out-Law News | 07 Oct 2014 | 5:20 pm | 2 min. read

The total amount that UK companies operating defined benefit (DB) pension schemes can together expect to pay into the 'lifeboat' fund that guarantees those pensions if the employer becomes insolvent will fall next year, the Pension Protection Fund (PPF) has announced.

However, the burden of the levy that would fall on individual employers would change under a new PPF-specific method of calculating employer risk, which will come into force on 31 October. Under the new method, around one third of employers can expect to contribute more, according to the PPF's response to its consultation on the new rules (91-page / 1.6MB PDF).

The estimated total pension protection levy that will be charged to firms for 2015/16 had been set at £635 million, nearly 10% lower than the PPF's estimate for 2014/15. PPF chief executive Alan Rubenstein said that the estimated levy for the following two years would be likely to be even lower "based on the expected path of asset values and yields".

The PPF has made some changes to its proposed new risk calculation method following "the highest number of responses to a consultation since 2005/06". It is now consulting further on giving companies more flexibility to use asset-backed contributions (ABCs) to reduce their PPF liability, and changes to the way it will treat mortgages taken out by the company.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the changes reflected the PPF's desire to ensure that the levy "properly reflects the true risk of scheme employers going bust".

"Changes to the levy calculations will cause pain to some, but the overall aim is to ensure schemes pay their due," he said.

"Employers will be pleased that the PPF has stepped back from its original harsh stance on ABCs. The PPF had intended to take into account ABCs only in respect of UK property. While certain intangible assets can be difficult to value, the PPF is right to acknowledge that they do have value," he said.

The PPF is funded by an annual levy paid by eligible DB pension schemes. It provides a certain amount of compensation to members of those schemes when the employer suffers a qualifying insolvency event, and where there are insufficient assets in the pension scheme to cover the amount of compensation that the PPF would pay.

From next year, the PPF will use a bespoke method of calculating the risk of employer insolvency, developed by financial data provider Experian, for the first time. This will enable it to take into account that those firms that are still operating DB pension schemes tend to be larger and older than UK companies more generally. The new method is not designed to change the total amount of levy raised but instead to distribute the burden more fairly, so that those firms most at risk contribute more.

The PPF had originally said that it would only allow companies to treat ABCs backed by UK property as 'assets' for the purposes of calculating their deficit. An ABC is a contractual funding arrangement under which an income stream is provided to the pension scheme. The revised rules will allow them to register ABCs using any underlying assets, as long as the scheme trustees have the arrangement certified based on a valuation of the assets in insolvency. It will also allow employers to exclude any mortgages that are "not relevant to insolvency risk" from the calculation.

"The success criteria for the model were set by our industry steering group and we have further engaged with stakeholders and levy payers throughout the consultation," said Rubenstein.

However, he said that the PPF would not introduce transitional provisions for those employers worst affected by the changes, as "the improvements to the model, the cost to other schemes and its complexity" ruled out doing so.

"We would like to make a final call for all employers and scheme advisers to be aware of the changes to the levy and what it means for them," he said. "We urge them all to log on to [our] portal to check their data - even if they have done previously, as the changes may affect some scores."