The Pension Protection Fund has announced that it aims to raise £635 million through levies in 2015/16, down from the £695 million it envisages collecting this year. It hopes to keep the formula that determines each employer’s levy the same in 2016/17 and 2017/18, and anticipates that this will see levies fall further as the numbers fed into the formula change. Confirmation of how the levy will be split between employers follows a consultation that began in May.
Commenting, Joanne Shepard, a senior consultant at Towers Watson, said: “It would have been surprising if the PPF had not set out to collect less next year than this year: its plans for reaching its self-sufficiency target are ahead of schedule and even quite big changes to the levy would make little difference to its chances of getting there.
“Indeed, employers may be disappointed that the bill they’ve been presented with isn’t smaller: £635 million is the amount the PPF would have expected to collect with no changes to the levy rules; in that sense, this isn’t really a levy cut. However, fixing the formula for three years is expected to see levies fall further as ‘bad years’ drop out of the period over which scheme funding levels are smoothed for levy calculations.
“‘Scheme-based’ levies – which reflect a scheme’s size rather than its strength – are expected to fall from 8% of total levy revenues to 2%. It’s welcome that the cost of cross-subsidies between employers is getting smaller, but the PPF remains committed to capping risk-based levies and clawing back the cost in this way. An entirely risk-based levy would be fairer.
“Changing how the bill gets divided up is a zero-sum game. The final proposals are better than some of the ideas that were consulted on but we think they could have been improved further.
“Sensibly, the PPF has decided against lumping the strongest 40% of employers together in a single insolvency risk band. Unfortunately, it still insists on grouping the strongest 20% together.
“The new Experian scores and how they feed into levies inevitably creates winners and losers. Most dramatically, the PPF estimates that 400 schemes will see their annual levies rise by a six-figure sum, while 300 schemes will see their levies cut by £100,000 or more. The ‘losers’ will be unhappy that no transitional protection is on offer, but the alternative was to overcharge other employers while the can was kicked down the road.
“The much greater role given to hard financial data in the Experian scores makes it harder for employers to improve their ranking without strengthening their business. Changes announced today also stop employers from doing this by changing the way that accounts are published: under the final proposals, simply filing consolidated accounts will no longer be sufficient to move an employer onto the ‘large and complex’ scorecard where this could reduce its levy.
“The final rules on how asset-backed contributions can help reduce PPF levies are less restrictive than had been feared. Assets such as overseas property and receivables will now qualify – there was never any good reason to exclude them. However, the PPF has rightly stuck to its guns on ‘undercollateralised’ structures: less credit will be given where the asset that the pension scheme would acquire if the employer went bust could easily be worth less than the contributions it is owed. It also wants evidence that the value placed on assets is robust.
“Some large employers will be relieved that the PPF has decided not to override their Experian scores with credit ratings. In most cases, affected employers would have paid higher levies – and we’ve seen cases where this would have been several times more. The flip-side is that other employers could then have paid less, but it would have been odd to put so much effort into developing the Experian scores and then discard many of them straight away.
“Standing back from all of the detail announced today, the big picture is that the PPF can’t set levies high enough to guarantee that compensation payments will not be cut in future but is collecting far more than it thinks it will require – even after this levy reduction. It’s understandable that the PPF wants a safety margin but employers would be happier about stumping up the money if there was a plan to return any funds that turn out not to be needed.”
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