By Edward Russell and Mark Dowsey from WTW
Moving the goalposts
The UK Budget delivered the promised pain of tax increases - with businesses and entrepreneurs taking much of that pain. At the same time, pension funds are being exhorted to invest more in UK plc.
It is galling, therefore, that defined benefit (DB) pension schemes and their sponsors are also expected to be required to fork out £100m that is acknowledged to be unnecessary .
For the second year in a row, the Pension Protection Fund (PPF) intends to raise a £100m levy that will add to its existing surplus; a surplus that means it is highly unlikely that any call will need be made on pension schemes and employers again.
It is widely acknowledged that the legislation, as was drafted more than twenty years ago, reflected the state of schemes in the PPF ‘universe’ at that time. The position is very different today. In the ‘Purple Book’ of 2006, the first year of publication, 83% of schemes were in deficit with an aggregate deficit of £76bn. In 2023, more than 80% of schemes were in surplus and the aggregate surplus was nearly £360bn.
Despite changes in market conditions that alone indicate that the levy should be no greater than £60m, the PPF is having to move the goalposts so as to raise £100m. The existence of the PPF’s £13bn surplus and 166% funding level supports the view that no levy is necessary for 2025-26 at all. The £100m, therefore, represents an unnecessary drain on scheme and sponsor resources – resources that could otherwise be helping to grow businesses and boost the economy.
The PPF, both last year and this, makes much of the fact that its hands are tied by legislative restrictions. However, it also makes a subtle, but important, distinction this year.
The new argument is that it is paramount that the PPF retain its “operational independence and the ability to respond to a future change in funding”. This bears some examination.
Fettered by legislation
As mentioned above, the UK legislative framework was created against the backdrop of widespread underfunding. The PPF itself was Government’s response to high profile insolvencies that left many scheme members with much smaller pensions than they had been promised. Funded, in part, by levies on schemes the legislation was drafted to ensure that most (at least 80%) of the funds expected to be raised were from the risk-based levy (RBL). This was in order to ensure that those schemes that represented the greatest risk paid most.
To mitigate the possibility of levies being increased to unaffordable levels, which could perversely have resulted in significantly greater numbers of sponsor insolvencies, two measures were also woven into the legislative fabric. The first was an absolute ‘ceiling’ on the amount that could be raised. Currently this stands at £1,349,215,811; so, no risk that this restricts the PPF’s ability to manoeuvre. The second measure was intended to reduce the shock of a massive year-on-year increase.
Section 177(5) of the Pensions Act 2004 limits this year-on-year increase to 25%. When the levy was £675m (as it was in 2007/08), that still gave the PPF plenty of scope to adjust upwards if circumstances justified it. However, if the levy were much smaller, say, £50m it could be many years before the levy could be increased to a level akin to the historical highs. Of course, a £nil levy would mean no increase would ever be possible.
As a result, the PPF argues that Parliament should amend the legislation to change that 25% figure or remove the year-on-year restriction altogether. The Pension Schemes Bill expected in the Spring affords that opportunity.
But wait a minute
Is that restriction all it seems? And why the subtle change in argument regarding operational independence?
We believe the answer is no, the ‘restriction’ is not a restriction at all. At best it is a hurdle, but one that could (and would, should the need arise) be easily overcome.
In anticipation of a need for some wriggle room, the Pensions Act contains a provision that would allow the Government to amend the 25% figure by Order of the Secretary of State. Such order-making powers are common in pensions legislation – revaluation orders and even the levy ceiling order are examples. These are made routinely (annually in the two examples) and easily. They can also be made quickly.
At the risking of boring you, there is an additional step needed first as the provision to vary the percentage is currently not ‘in force’, so an additional (commencement) order would have to be made. However, that again, could easily be achieved.
The PPF’s stance, and citing of the need for operational independence, therefore appears to signal that it does not trust the Government of the day to make such orders should the need arise.
Our question is whether that distrust is justified? In our view it seems highly unlikely that, in the extreme “significant global and domestic risks” scenario that might warrant a return to much larger aggregate levies being needed, the Government of the day would risk the PPF ‘Lifeboat’ sinking with its 292,000 members onboard. The current Government perhaps even less so given the fact, mixing boating metaphors, that the PPF was one of a previous Labour Government’s flagship policies.
By collecting £100m that it doesn’t need, is the PPF protecting the public from the possible actions of a future government, or imposing an unnecessary cost on businesses today?
Suppose they really don’t trust Government
The PPF argued in its 2023 consultation that it required a levy of £100m. Since then, the PPF’s own surplus has grown by some £1.1bn, and the PPF’s ‘universe’ of schemes is stronger, too. Given this growth in the PPF’s surplus, surely if £100m was needed then, less is needed now.
For example, £100m (with 25% pa increases) over five years would be some £821m. Therefore, given the surplus has already grown by that amount and more, could the PPF not afford itself an extra five years to get back to £100m? Based on 25% increases each year, this would suggest a levy of £41m, not £100m.
Couldn’t the £59m difference be better used if it remained in the hands of businesses rather than further adding to the PPF’s already large surplus?
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