PPF levy consultation raises fairness concerns

The announcement of a reduced overall levy of £600m for next year was welcomed, but there were questions raised over the fairness of how evenly it would be distributed.

Lynda Whitney, principal consultant at Hewitt Associates, predicted levies could increase by around 50% for those worst affected.

She added: “Schemes that have worked hard to improve their funding levels are effectively being penalised as they will now not see the level of reduction in levies they expected.

“We believe this reduction in the total PPF levy will be a one-off drop – schemes should not take today’s move as a signal to expect a trend of reducing PPF levies."

This year, the amount to be raised by the PPF in the form of levy was set at £720m. For 2011/12 it was due to be £740m, but will now drop to £600m because of the government’s proposals to move from retail price inflation (RPI) indexing to consumer price inflation (CPI).

Historically, the CPI has been on average 0.7% lower than the RPI. If this measure comes into force, it will translate into lower liabilities for schemes. And this, in turn, would mean a lower potential burden for the PPF.

The PPF’s proposals will also exclude schemes whose funding level is above 155% from paying the levy, up from the current level of 135%. In addition, the levy scaling factor will be calculated using a cap of 0.75% instead of 0.5%.

Milan Macheka, consultant and actuary at Aon Consulting, said these changes will significantly affect the amount schemes will have to pay.

“The levy will be either higher or lower, but we are likely to see some extremes. It’s the distribution which will be altered,” said Macheka.

Speaking to schemeXpert.com , Alan Rubenstein (pictured), chief executive of the PPF, said: “We wanted to strike a balance, ensuring that if the government changed its mind, we could get back to an appropriate RPI-based levy.

“If there had been no change, we’d probably have left the levy as it was. The Pensions Regulator has asked for schemes to ensure some of the benefit is used to help scheme funding where there’s a deficit so it’s appropriate that we send a message that supports this view.”

Dismissing the industry’s concerns, a spokesman for the PPF said some schemes pay more and others less every year, because as each scheme’s relative funding position and insolvency probability changes, so does their levy.

“However we have set the cap at a level which protects the weakest 10% of schemes, as we did last year; we have moved the tapers up to reflect the improved funding across the universe, with the result that 4% of schemes will pay no risk based levy – which is actually double the proportion that pay no risk based levy this year.

“Overall we are reducing the levy across the scheme universe by 17% – which has got to be good news for schemes as a whole,” they added.