Joanne Shepard, a senior consultant at Towers Watson, has commented on today’s proposals to overhaul the way that Pension Protection Fund levies are shared out. Joanne commented:
Winner and losers
“The PPF thinks its new way of calculating levies will better reflect the risks that schemes pose – and therefore that some schemes have been paying more than their fair share in the past, while others have not been paying enough.
“Inevitably, a radical overhaul means big changes for individual schemes. 600 schemes whose levy is above £10,000 are expected to see their levy more than double. 300 of these would see it more than treble, including five schemes who would have to pay between 13 and 20 times as much as they do now. Including small schemes as well, it looks as though 1,200 schemes could face a trebling of their levy or more.
“There would be some big winners too, with 600 schemes whose levy is above £10,000 paying no more than half what they do now.
“Two changes are driving this – the new way of estimating a company’s insolvency risk and a new approach to lumping companies of similar strengths together for levy purposes. 35% of scheme sponsors were in the top band under the old system and only 20% are under the new system. Many of those slipping down a band will pay more.”
(Figures from page 25 of the PPF’s annex and pages 9, 37 and 38 of its main consultation document)
What could still change
“Today’s announcement is about how to share the pain of PPF levies, not how much pain there will be: the PPF has yet to confirm precisely how much it will seek to raise in levies over the next three years. Its strategy is clearly to collect far more than it thinks it will need, so it has some margin for error if things go wrong. That’s understandable, but the employers who are paying for the PPF to build up a war chest might be happier if there was a plan to return any superfluous funds.
“Subject to that, schemes can get a good idea of how their levy might change, but a lot is still up in the air.
“The PPF is open to the idea of using fewer levy bands. This would disadvantage the strongest employers and introduce bigger ‘cliff edges’, where a small change in insolvency risk can lead to a big change in levy.
“It is also asking whether it should provide one year’s worth of transitional protection to the 1,200 worst affected schemes, paid for by higher levies for everyone else. Allowing credit ratings to trump Experian scores when estimating the risk a company poses is also on the table.
Asset-backed funding and guarantees
“For a long time, the PPF has thought that some companies are getting too much credit for asset-backed funding structures and should be paying higher levies. Companies who have used stock, brands or inter-company loans to improve the funding position of the pension scheme may no longer see any reduction in the levy they pay. Even where UK property is used, there can be less impact than before if the value of the asset has not already been marked down to reflect what it might fetch following the employer’s insolvency.
“In some cases, guarantees from other companies in the employer’s corporate group will also stop working to reduce the levy. This can be because the guarantor is no longer ranked as stronger than the scheme sponsor, or because this no longer makes a difference to their levy band.”
|
