This week, the Pension Protection Fund (PPF)
confirmed that it expects to raise around £550 million through levies in
each of the three years from 2012/13, down from £600 million in 2011/12 but
still much higher than Parliament envisaged when the PPF was set up (£300
million before indexation). According to Towers Watson, the PPF's
announcement:
* Does not explain why the PPF believes it now needs £50 million a
year less - making it difficult to judge whether this money will be clawed
back from employers later on;
* Underlines how 91% of employers are likely to pay at least 12% more
on average, compared with what the PPF thinks they should be charged for the
risks they pose, to cross-subsidise the remaining 9%;
* Closes a loophole which may have been used to reduce levies
artificially;
* Contains some sensible improvements when it comes to which
organisations can provide guarantees and how guarantees affect
multi-employer schemes' levies; and
* Does not mean that all employers will pay less. The new levy
formula means that strong employers with poorly funded schemes will pay a
bigger share of the levy. For some, this will outweigh the impact of the
£50 million cut in the total amount collected.
Why has the levy been cut?
To justify collecting less money, the PPF must have changed its mind either
about how much compensation it can expect to pay in future or about the
prudence margin it should build into its plans.
The PPF has not explained how changes to its modelling assumptions affect
the compensation it expects to pay. For example, it has not said whether it
is still budgeting on the basis that the gap between CPI and RPI inflation
will be 0.5% (as it did when it reduced the levy from £720 million in
2010/11 to £600 million in 2011/12). A bigger assumed gap would allow it to
charge lower levies.
The PPF says that levies at the £550 million level are in line with its
objective of having a greater than 80% chance of reaching self-sufficiency
by 2030. So, at first sight, the level of prudence has not changed (unless
the assumptions made when calculating this are less cautious). However, in
December 2010, the PPF said that a £600 million levy would give it an 85%
chance of reaching self-sufficiency by 2030. It has not confirmed that it
thinks the probability remains quite this high.
Joanne Shepard, a senior consultant at Towers Watson, said: "Lower levies
will be welcomed by employers, especially as they are still paying for the
PPF to build up a war chest. The Government will also enjoy saying that
burdens on business are being held down. However, because the £550 million
number has come out of a black box, it's hard to tell whether this is just a
temporary reprieve during difficult conditions. Has the PPF really changed
its view about how much it ought to be raising in light of the risks it
faces? Or is it just seeking to raise less of this money at this point in
the economic cycle?"
A £60 million cross-subsidy
The PPF expects 11% of the £550 million levy to come from a flat percentage
charge on all schemes' assets. This is less than the 20% previously raised
this way but still very substantial - more than £60 million a year.
The money raised from this "scheme-based levy" allows risk-based levies to
be capped at 0.75% of liabilities for the 9% of schemes who would otherwise
have to pay more. Precisely how much it adds to the levies that have to be
paid by the other 91% depends on details that have not been published, but
it appears likely that the average impact will be at least 12%.
Joanne Shepard said: "The vast majority of employers will have to pay a
hefty surcharge to cover risks posed by a minority. The PPF says that
paying a full levy might push the weakest schemes over the edge, but this is
a very big cross-subsidy. It previously suggested that employers may have
to stop promising new benefits before they could benefit from this levy cap,
but this doesn't seem to have been taken forward."
Guarantees - a loophole closed?
PPF levies can be reduced where an associated employer whose insolvency
score puts it in a better levy band than the sponsor guarantees at least
105% of the liabilities that could otherwise be picked up by the PPF. The
PPF says it has uncovered cases where these guarantees are "of limited or no
value". To prevent levies being reduced artificially, schemes will be
required to certify that the guarantor "could be expected to meet their full
commitment...if called upon to do so as at the date of the certificate", and
the PPF can ask for evidence of this.
Joanne Shepard said: "This appears to close a loophole which some companies
may have been trying to exploit. Very small companies can have strong
credit ratings but this doesn't mean they are in a position to stand behind
a very large pension scheme. This is a reminder that solutions which take
advantage of the letter of the law but go against its spirit often get
closed down before the employer has derived much benefit. Schemes with
genuine guarantees in place will hope the process of satisfying the PPF will
not prove too onerous."
Improvements to rules on how guarantees affect levies
Changes to contingent asset rules widen the range of employers who can
provide guarantees that count towards levy calculations, so that these can
be offered by organisations who have a relevant interest in the pension
scheme without being "associated" with its sponsoring employer in the strict
legal sense. Also, where a guarantee is provided in relation to a
multi-employer pension scheme, the guarantor's insolvency band will only
need to be substituted for those of weaker employers.
Joanne Shepard said: "Both of these changes should make it more likely that
guarantees will be put in place. Previously, guaranteeing a multi-employer
scheme would only have reduced the levy if the guarantor was stronger than
the average of participating employers. Now a guarantee can reduce the levy
as long as some participating employers are weaker than the guarantor. This
should lead to a more sensible levy calculation for multi-employer schemes.
"However, some employers who previously provided guarantees in the
expectation that this would lead to a permanent reduction in the levy may
now be regretting this. Because the PPF is now using only 10 insolvency
bands instead of 100, there won't always be a levy saving where the
guarantor is stronger than the sponsor."
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