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30 May 2008
PPF announces levy scaling factors for 2008/9The Pension Protection Fund announced today the scaling factors that will be used when calculating pension protection levies for 2008/9.
As reported in our News items of 30 November and 14 December 2007, the PPF will be changing the way the total pension protection levy of £675m for 2008/9 is to be allocated across all eligible schemes. See our In Focus dated 14 December 2007 for further details.
The PPF's calculation formulae were confirmed when it published its determination for 2008/9 on 19 February 2008, but the scaling factors for the scheme-based and risk-based elements of the levy were not finalised until today.
The PPF has confirmed:
- the scheme-based levy scaling factor will be 0.0165%, compared with the PPF's November 2007 estimate of 0.0152%
- the risk-based levy scaling factor will be 3.77, more than double the estimated 1.60!
The PPF says it has "seen scheme funding and insolvency probabilities improve" since it came up with its estimates.
Comments
Many schemes may be left wishing they had done more to reduce their risk-based levy by the deadline of 31 March 2008. Had employers known that the risk-based levy scaling factor would be radically higher than the PPF's estimate of 1.60 and that each £1,000 they thought they could save by paying additional contributions was actually going to be £2,356, their cost/benefit analyses would have shown different results and the balance may have been tipped in favour of taking action.
At first sight it seems rather bizarre that the scaling factors should be increased as a result of improved scheme funding positions and sponsors' risk ratings; the lay reader may have expected the opposite. We estimate that the PPF would have raised just over £350m in pension protection levies during 2008/9 if it had kept the scaling factors at the estimated levels. The rise in the scaling factors is driven by the PPF's desire to deliver stability to levy-payers by holding the total pension protection levy it intends to raise each year at £675m in real terms for up to 3 years.
All this just demonstrates how volatile the PPF's finances can be and calls into question whether it is necessarily appropriate for the PPF to aim for stability in the total levy raised. However, the worsening economic conditions resulting from the credit crunch could be expected to lead to more and higher claims falling on the PPF, so it is prudent for the PPF to collect more than would be suggested by looking at short-term risks.
The PPF, of course, had a difficult job when it came to estimating the scaling factors in advance. Not only was it at the mercy of changes in market conditions, it was also being supplied with new information. It received over 2,800 new valuations by 31 March 2008 as well as £5 billion worth of deficit-reduction contribution certificates and over 200 new contingent asset certificates.
Under the PPF's new approach to calculating levies, the only actions sponsors can take action to reduce their levies for 2009/10 are to provide contingent assets or to pay deficit-reduction contributions (provided both are certified). However, it should be remembered that other actions taken between now and 31 March 2009 will affect the levies payable in 2010/11. There is no room for complacency!
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For further information:
Gary TansleyTel: 01737 841 732
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