On the go: The Pension Protection Fund has confirmed it will halve the levy for schemes with less than £20m in liabilities in order to “better reflect the risk posed by small schemes”, according to the final version of its 2021-22 levy rules.
However, the lifeboat fund has warned that relaxed measures and lower levy payments may have to change in the coming years in response to the rise in insolvency risk.
The “small scheme adjustment” will be tapered so that only schemes with more than £50m in liabilities will be charged in full, the rules stated.
The final version of the rules, initially proposed in September, will see a reduction of the cap on an individual scheme’s levy from 0.5 per cent to 0.25 per cent of its liabilities.
The PPF will measure insolvency risk using credit ratings, alongside the insolvency risk model operated by Dun & Bradstreet, which it has been doing since April last year.
In all, it expects to collect a levy of £520m, retaining a levy scaling factor of 0.48. This estimate remains unchanged from the figure published towards the end of 2020 — which is £100m lower than the levy collected in 2019, and was justified in light of the PPF’s “strong financial position”.
The lower figure was produced in part to offset the effects of the Covid-19 pandemic, which has also led to the PPF publishing only its expectations for the year ahead, rather than the usual three-year period. This is because it expects to see “significant changes in our assessment of insolvency risk over the coming years”, according to the lifeboat.
In the policy statement accompanying the final rules, the PPF said it hopes to be able to return to the multi-year approach from 2023-24.
“In the meantime, adopting a year-by-year approach will give us the flexibility to assess the right balance of responsive action; for example, across-the-board measures and/or targeted approaches,” the statement read.
It noted the widespread support from the industry for short-term flexibility, with 49 out of 55 respondents to the consultation backing the change in approach.
“In considering any changes to the levy calculation, we will start from a position of preserving stability, unless there is a clear case for change. But we need to acknowledge that the anticipated rise in overall insolvency risk — due to the pandemic — may increase the overall collection required in future years,” the lifeboat stated.
In his foreword to the statement, David Taylor, executive director and general counsel at the PPF, said: “We recognise that we are publishing this policy statement at an extremely difficult time due to the pandemic. But we hope the policy and service measures we are introducing will provide effective support to levy payers while maintaining a risk-reflective levy.
“We will continue to monitor economic and other developments carefully and consider what, if any, changes to our rules are necessary in view of these exceptional circumstances in future years.”
Guidance for commercial consolidators was published alongside the final rules, and confirms plans detailed in the initial consultation for a separate methodology to calculate the levy paid by superfunds.
