By Joanne Shepard, Director and David Robbins, Director, Retirement at WTW
Levy payers may, though, wonder whether they should be paying anything at all: the PPF’s reserves are almost six times as big as the combined shortfalls of schemes which would make a claim if the sponsor became insolvent tomorrow, and there is still no mechanism for returning funds that the PPF turns out not to need.
In its consultation paper, the PPF says that there would indeed be “a case” for not charging a levy next year if it had a free hand over what to do thereafter. The problem, it says, is that it can only increase the “levy estimate” (the amount it thinks the levy rules it sets will generate) by 25% year-on-year. Since 25% of zero is zero, not charging a levy next year would mean never charging one again. The PPF would like this law to change but does not seem hopeful that Parliamentary time (an especially scarce resource in the run-up to a general election) will be made available, and we would speculate that fixing problems relating to its core function may not be as high up its legislative wishlist as a change of remit that would allow it to consolidate solvent employers’ schemes. In any case, the PPF is not going to force the issue by setting a zero levy.
Noting that “any figure chosen is necessarily a compromise between the need to retain an ability to respond to adverse events and the possibility that the levies collected might not be needed,” the PPF looked at how much it could raise over the next decade if it increases levies by 25% every year, and concluded that “£100 million per annum is the lowest level at which we could safely set a levy”.
As the PPF acknowledges in a footnote in the consultation paper, however, “the legislation allows for the Secretary of State to take powers to increase the maximum percentage increase”. In other words, the Government could, in short order, substitute a much larger number for 25%; this would allow the 2024/25 levy to be set at any level other than zero without imperilling the PPF’s ability to charge appropriate amounts in future adverse scenarios. Moreover, by the PPF’s own reckoning this is unlikely to be necessary.
Setting out to raise only a nominal sum may make the cost and process of collection look disproportionate, but that would strengthen the case for changing the law so that levies can be set to zero temporarily (especially if the King’s Speech includes a Pensions Bill to which new clauses could be added).
Explaining why it has nonetheless acted on the basis that the 25% limit is set in stone, the PPF says that use of these powers would “not be straightforward or certain, as it would require secondary legislation and a consultation process and would likely present the Secretary of State at the time with a difficult decision in light of competing stakeholder interests”.
The process-based objections are unconvincing: the regulations need only be a few lines long and could be approved easily, and a consultation could be completed in weeks (or avoided altogether, if the requirement to hold a consultation were not brought into force).
What of the substantive objection: that a democratically accountable government would balance stakeholders’ interests wrongly when technocrats would get this right? It seems unlikely that politicians would stand in the way of levies rising sharply from a very low base if the alternative were compensation increases being cancelled, and the PPF Board could withhold compensation increases if prevented from raising an adequate levy. Perhaps the Board fears that it could not credibly threaten this in circumstances where the chance of it having enough money remained very high (just not as high as it would like).
80% of estimated revenues must come from risk-based levies, but improvements to scheme funding mean that risks are now much diminished.
Having settled on £100 million based on how quickly this could be ramped up at 25% a year, the PPF needed to set levy rules that would produce this figure and ran into a further difficulty arising from legislation that it would prefer to see changed: 80% of estimated revenues must come from risk-based levies, but improvements to scheme funding mean that risks are now much diminished - for example, the Pensions Regulator estimates that a quarter of schemes have sufficient assets to buy out all liabilities with an insurer.
One of the measures employed to square this circle is to make risks look bigger than they are by using out-of-date valuation assumptions: the PPF proposes delaying the adoption of new financial and mortality assumptions which together improve funding levels by around five percentage points. Reflecting the latest data would, it says, reduce the pool of risk-based levy payers by 20%.
If the risk-based levy survives in one form or another, some schemes which reasonably consider themselves a negligible threat to the PPF will end up paying it. Conversely, if Parliament changes the law to allow the PPF to rely on scheme-based levies alone, some very well-funded schemes would be punished for their size (which would be ironic when the Government is arguing that the DB landscape is too fragmented). Allowing levies to be set to zero – and ramped up again if the worst happens – would avoid this choice. In the meantime, the PPF could take a much bigger step in that direction while not fudging the way that risks are assessed.
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