On the go: The Pension Protection Fund has raised the levy it charges employers sponsoring defined benefit schemes, as worsening underfunding and declining gilt yields take their toll on the sector.
The PPF’s levy estimate for 2020-21 is £620m, it said in a consultation published on Wednesday, a rise of 8 per cent on the £575m for the 2019-20 levy year.
In the consultation, the pensions lifeboat explains that it has seen the highest level of claims in its history in the past year, with uncertainties about global and UK markets adding to financial pressures.
The PPF also points to pension-specific uncertainties such as court cases regarding the UK’s obligation to protect pension incomes in insolvency. It says: “These have the potential to affect the risks the PPF faces, the level of compensation it pays, and therefore both the level of the PPF’s funding and of future claims.”
David Taylor, executive director and general counsel at the PPF, commented: “The environment in which we are operating has changed. In particular, we have seen significant increases in scheme underfunding driven by declines in the yields on gilts.
“This represents an increase in risk to us, and although we smooth scheme funding over five years, we do still expect levy collections to increase as a consequence.”
However, in the consultation on how levies will be calculated for 2020-21, the PPF confirmed that it intends to make no substantive changes.
Mr Taylor said: “As we aren’t changing the rules, and bills are based on the actual risk of individual schemes, the impact on individual schemes will depend very much on their specific circumstances.”
Commenting on the consultation, Emily Sturgess, senior consultant at XPS Pensions, said: “While the increase is understandable, levy payers need to make sure they don’t end up paying large increases unnecessarily.
“A number of schemes may have introduced hedging and there are actions they can take to ensure that the PPF reflects this in their levy. Those that have protected against interest rate falls should not pay any more than required.”
The PPF’s reserves decreased from £6.7bn to £6.1bn in the past financial year. Nevertheless, Mr Taylor said: “Our funding position remains strong and we’re on track to achieve our long-term funding objective.”
The consultation also invited stakeholders to comment on how levy rules might need to be developed in the future for schemes without a substantive sponsor and commercial consolidators, and to give feedback on revised guidance for completing contingent asset guarantor strength reports.
The levy consultation closes on November 5 2019.
