Relief as Pension Protection Fund limits levy to £575m

Click to follow

The Pensions Protection Fund handed a Christmas bonus to the City yesterday, announcing that its total levy for the next tax year would be less than half the amount some had initially feared.

In total, the PPF is to raise £575m next year, broadly equivalent to the amount it needs to cover its liabilities. Although this is almost double the £300m that the Government estimated the fund would need to raise, it is less than half the amount that some actuaries and commentators had predicted would be needed.

Partha Dasgupta, the PPF's finance director, admitted yesterday that the decision to keep the levy around the current level of predicted liabilities was partly a political move to limit the shock to businesses and pension funds in the early stages of the PPF's life. But he also conceded that the decision to not begin building up some extra reserves could leave the fund exposed in the event of a serious macroeconomic shock.

The City broadly welcomed the PPF's announcement yesterday - in particular, the news that several key changes had been made to the rules surrounding the fund, giving employers greater flexibility.

These include a provision to allow certain company assets to be taken into consideration when calculating the risk-based part of their levy. This would allow companies to provide their property assets as security against their pension fund, for example enabling the fund to earn a lower risk rating, and hence pay a lower levy.

The new rules have also dramatically reduced the maximum amount which any one pension fund will have to pay into the PPF - from 3 per cent to just 0.5 per cent of the fund's liabilities. This will ensure weaker schemes are not thrust into a vicious cycle by hefty PPF payments each year.

The PPF also listened to requests from the industry to broaden the number of insolvency risk categories - which are used to determine the risk-based part of the levy. Companies will now be put into one of 100 risk categories, rather than the originally proposed 10.

Lawrence Churchill, the chairman of PPF, said: "Our proposals strike the right balance between security for pension scheme members and cost to the levy payer. They demonstrate our commitment to listen to and work with industry to develop a levy that is fair, simple and proportionate. We believe that this vital protection could not be provided at a lower cost."

The National Association of Pension Funds said it was delighted the PPF had listened to, and acted to put straight, its initial concerns with the levy structure. Christine Farnish, the NAPF's chief executive, said: "The legislative context in which the PPF was conceived was far from ideal. But Lawrence Churchill and his colleagues have worked assiduously to engage with the industry and respond positively to our concerns."

The CBI said that while it welcomed the modifications to the levy structure, it still believed £575m was an "unacceptable" amount for industry to be paying.

Stephen Yeo, a senior consultant at the actuaries Watson Wyatt, pointed out that firms should be under no illusion that the levy would rise in future years. "If the cost is held down relative to the benefits now, it will rise later, or the benefits will have to be cut," he said. "It would be far preferable, in my view, for the benefits to be cut to an affordable level now."