PPF to Reduce Levy Caps

by Guest Contributor

harness the power of compounding interestAfter consultation in September, the PPF confirmed the levy estimate for 2013/14 to be £630 million, with the scaling factor reduced from 0.89 to 0.73. A reduction was also made to the scheme-based levy multiplier (from 0.000085 to 0.000056) – meaning fewer schemes will see their levies capped. The consultation, backed by the industry, is a move to deliberately hold down the levy as a reflection of the uncertain economic climate.

While other rules for levy calculation remained the same, a reduction was also made on credit requirements – ensuring an ‘A’ rating would be sufficient for receiving a bank guarantee. As an adjunct to that change, the PPF updated guidance, for groups and individuals providing pension trustee services, on using those guarantees as contingent assets, should the need arise.

Following the consultation, the PPF also released an updated schedule of the key dates and deadlines of the 2013/14 period, for all eligible schemes. The schedule includes standard instructions on submitting scheme return data, deadlines for certifications of contingent assets, and timetables for insolvency risk calculations and deficit reduction contributions.

Chief Executive of the PPF, Alan Rubenstein commented on the consultation process and the decision to fix the levy:

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“I am grateful to all those who took the opportunity to respond to the consultation.” said Rubenstein, responding to questions focussed on the Levy Estimate. “We have seen pension scheme funding deteriorate significantly in the last eighteen months and claims in the first few months of the current year have exceeded our annual levy. However, the board decided, exceptionally, to hold down levies in 2013/14 so that schemes will typically see levies at similar levels to this year.

Many observers welcomed the changes, but noted an increased pressure placed upon trustee services:

“We are pleased to see more detailed guidance for trustees on the area of the guarantor strength for putting in place genuine guarantees” said Aidan O’Mahoney, partner at Aon Hewitt. “However, the guidance places additional responsibility on trustees as their judgement is required on a number of factors.”

Milan Makhecha, Aon Hewitt principal consultant pointed out that some trustees may err on the side of caution when dealing with de-risking strategies :

“The information from the PPF is helpful,” said Makhecha, “but it could deter some trustees from putting guarantees in place, especially if they have any doubt they will be accepted by the PPF, which we think is not in the best interest of de-risking pension schemes in general.”

Rubenstein remains confident that the fixed levy approach is not only prudent but in line with the PPF’s commitment to acknowledging the difficulties pensions face in the current economic climate:

“It remains our guiding principle that the amount we levy should rise or fall with movements in scheme risk and this will continue to apply.” said Rubenstein. “I am grateful for the recognition therefore that the action the Board has taken for 2013/14 was exceptional and levy increases in future should be expected if the current high risk conditions persist.”

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