Employers win battle to reform pensions levy

Large companies with final salary pension schemes appear to have won a significant victory, with the industry compensation scheme today set to unveil a raft of new rules following pressure from employers.

The Pension Protection Fund (PPF), the compensation lifeboat that pays out to pension scheme members in the event that their employer goes bust without having fully funded benefits, is to announce a new framework for its levy, the mechanism through which it raises funds from all companies with final salary plans.

While employers have generally always accepted the need to fund the PPF, there has been a great deal of criticism in the past over the way the pension levy is calculated.

Companies have faced much larger demands for contributions in some years than others, while attempts to make employers pay more if they are judged to be more likely to fall into administration have sometimes proved controversial.

Under the new arrangements, to be formally announced today, the PPF has agreed that the levy formula will be set in stone for at least three years from 2012-13, in order to give companies more certainty about what they will have to contribute.

In addition, funding levels will be averaged out, so that short-term volatility on the stock market and in other asset classes does not produce a misleading valuation when the PPF works out how much to charge.

It will also introduce 10 separate ratings for companies' likelihood of going under, up from six currently, to better reflect different levels of financial health across the spectrum of private sector businesses.

Alan Rubenstein, the PPF's chief executive, said the overhaul of the structure of the levy on companies reflected the concerns of those who contribute to it. "This marks a significant milestone on our journey to construct a levy which is fit for purpose in the long term," he said.

The reforms were welcomed by businesses groups, with the Confederation of British Industry backing the proposals. Jim Bligh, principal policy adviser at the employers' organisation, said: "Business asked the PPF to make the levy more stable and predictable over time, and we hope by fixing levy rules for three years this model will achieve that."

The National Association of Pension Funds, whose members have combined assets of nearly £800bn, also welcomed the announcement, though it said it would need to look at the small print of what the PPF is proposing.

"This is a step in the right direction – it establishes a clearer link between a scheme's overall health and the amount of the levy it has to pay," the NAPF's chief executive, Joanne Segars, said. "But we now need to study the details carefully. There is a concern about the costs of the new investment risk calculation for larger schemes. And some schemes with very good insolvency ratings will see their levies rise."