Pension Protection Fund consults on including longer-term risk in levy

The Pension Protection Fund (PPF) has launched a consultation on including the individual longer-term risk of schemes in future levy calculations.

The consultation sets out the PPF’s proposals to make the pension protection levy paid by eligible pension schemes more tailored to the individual risk that each scheme poses to it. The key features of its proposals are to assess the probability of a scheme’s sponsoring employer going bust during a five-year period, in addition to the current one-year period, and take account of the risk that a scheme’s investment strategy poses to the PPF when calculating its individual levy.

Including longer-term risk when calculating individual levies is intended to result in fairer bills for levy payers. It may also help to make individual levies less volatile and more predictable. 

Partha Dasgupta, chief executive of the PPF, said: “Levy payers have given is a strong message that the current system does not differentiate enough between schemes, and that levy bills should be less volatile.

“The proposals will change the distribution of the levy among schemes to more accurately reflect the risks that we face – there are a similar number of schemes that will pay more as will pay less.”

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However John Ball, head of defined benefit consulting at Watson Wyatt, said that sponsor’s of well-funded schemes could end up paying more. “Charging schemes according to how risky their asset allocation is may sound like the right thing to do but is easier said than done. It is too simple to say that bonds are low risk if a scheme invests in short-dated bonds that are not linked to inflation when its liabilities are long-term and inflation-linked.”
He warned that one-in-six schemes could end up paying more under the proposals and one in ten could see their bills double.

The consultation will run for three months. If the proposals are accepted, they will be implemented in 2011/12 and will represent the culmination of the development of the levy.