Nestlé's KitKat threat: 1,600 UK jobs at stake in pensions levy row

Safety net will need £700m from business, and PPF calculations are leading to battles over soaring bills

Nestlé, the Swiss food giant, has warned it may stop manufacturing KitKats and Smarties in the UK over a row about how much it has to pay each year to the Pension Protection Fund.

The administrators of the PPF, set up earlier this year to provide a safety net for occupational pension schemes, are preparing to say how much it needs to raise from British business. They will next month call for as much as £700m a year, more than twice the £300m it was estimated would be needed when the PPF was launched.

The row is understood to threaten up to 1,600 jobs in York, where Nestlé makes confectionery. The company has been told by the PPF that the "risk-based" levy it would have to pay could be as much as £12m a year. Nestlé had been expecting to pay only about £300,000.

The group's chief executive, Peter Brabeck-Letmathe, is so unhappy about the high levy that Nestlé has threatened to move production of KitKats and Smarties to the Czech Republic.

The problem is that the formula used by the PPF - calculated using so called "failure scores" worked out by business information provider Dun & Bradstreet - does not take into account guarantees from the parent company. The PPF is talking about amending the calculations, but Nestlé is still concerned.

"It is our belief that if UK labour costs for any manufacturer get out of line because of increased costs, including pension provision, this could result in jobs being moved to more competitive locations. It would also cause companies to reconsider their current pension scheme offerings, which could lead to further scheme closures," the company said in a statement.

Nestlé is not the only firm in dispute with the PPF. Trinity Mirror is one of a number of media companies furious that the PPF formula does not allow for the values of intangible assets, such as newspaper titles.

It is estimated that Trinity Mirror's PPF levy will be around £10m, five times what had been expected. "While the concept of the levy is understandable, the proposed use of Dun & Bradstreet's 'failure scores' to assess insolvency risk is both illogical and unfair, as they currently discount intangibles," it said.

Other companies have complained to the PPF about their likely levy. British Airways is believed to be facing a bill of up to £30m a year, and BAE Systems could have to fork out £17m, according to industry estimates.

Pensions experts have claimed the Dun & Bradstreet methodology is full of problems. Not least is that its "failure rating" can be sent soaring by any county court judgement against a company. However, Stephen Yeo at actuary Watson Wyatt said the real problem could be that many companies receive too good a rating from Dun & Bradstreet, with the effect that less financially secure ones "will get clobbered".