The Board of the UK Pension Protection Fund – the British equivalent of the American Pension Guaranty Fund, designed to rescue pension plans from ailing plan sponsors – has published for consultation its levy estimate of 675 million for 2007/08.
The Board explains that the proposed levy estimate will help to make up for an under-collection of levy fees during 2006-2007, and help to reduce the Pension Protection Fund’s deficit, thereby bolstering public confidence in the fund’s financial security.
“The announcement accords with the views of many advisors; that we should recoup some of the undercollection of last year’s levy,” says PPF Chairman, Lawrence Churchill. “The Board has taken a measured approach which should reduce some of the Fund’s deficit in 2007/08.”
PPF Chief Executive, Partha Dasgupta, adds that last year the Fund collected less money than originally anticipated because of market movements, improvements in the quality of data, direct action by schemes to reduce their risk and as a result of fixing the process for distributing the levy between schemes. “Going forward, we will need to collect a levy nearer our original estimate,” he says. “Importantly, the funding arrangements announced today will further ensure public confidence in the financial security of the Pension Protection Fund, reassuring beneficiaries that their compensation each month is coming from a known, trusted and stable source. Now that more detailed information on schemes is available through the Purple Book published earlier this week, we have decided that a 1.25 per cent cap on how much an individual scheme pays in risk based levy strikes the right balance between continuing to protect weaker schemes and not penalising stronger schemes which subsidise them.”
Dasgupta also stresses that continuing to provide incentives to pension schemes to reduce their own risks remains at the heart of the PPF proposals.
Copies of ‘The 2007/08 Pension Protection Levy Estimate Consultation Document December 2006’ can be found on the Pension Protection Fund’s website at www.pensionprotectionfund.org.uk. Responses to the consultation are requested by 2 February 2007.
The risk based levy is a model which PPF believes to be adequate to protect occupational scheme members against financial disaster should their pension scheme collapse. Schemes which are more than 125 per cent funded, on a Pension Protection Fund basis, will be exempt from the risk based levy.
The PPF has also announced changes to the way the levy is distributed between eligible schemes, and will fix the date at which scheme underfunding is calculated at 31 October 2006. The goal is to minimise the risks of pension schemes overpaying levy charges, and the PPF not collecting enough, so ensuring that the PPF collects a levy closer to its estimate than last year. The Pension Protection Fund is also proposing a revised approach to the weighting applied to County Court Judgements for sponsoring employers within the Pension Protection Fund universe.
The Board is also confirming some other limited changes to the distribution of the levy between schemes. These changes were consulted on earlier in the year. In summary, the changes were:
* Revised standard documentation for contingent assets, including new standard documentation for a Type C contingent asset (letter of credit or bank guarantee) in support of a schedule of deficit-reduction contributions;* Revised section 179 guidance, following earlier consultation with the actuarial profession; and* A revised approach to the inclusion of insured liabilities within a section 179 valuation
The Pension Protection Fund was set up in April 2005 under the provisions of the Pensions Act 2004 It was established to pay compensation to members of eligible defined benefit and hybrid pension schemes where there is a “qualifying insolvency event” on the part of the pension plan sponsor, and where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation.