£575m Pension Protection Fund levy smaller than expected

The UK’s 8,000 final salary pension schemes will have to pay double the amount estimated next year to finance the Pension Protection Fund (PPF).

However, the £575m bill for the levy – which is designed to provide security for employees whose pension schemes are inadequately funded – has been greeted with relief by employers, who feared the bill could be much higher.

The final amount is far bigger than the estimated £300m, but is small in comparison to the estimated shortfall of £100bn in final salary schemes.

The amount each company will pay will depend on how well funded their pensions scheme is.

The levy, which will be paid through the pension schemes themselves, will be capped at a level that is no more than 0.5% of its liabilities.

Miles Templeman, director-general of the Institute of Directors, said the announcement of the levy meant that companies now had a clearer picture of what they will pay.

“This is a very difficult area where a sensible balance needs to be struck to ensure the security of pension scheme members while making sure the levy cost is not too great,” he said.

“The PPF proposals announced today appear to get the balance about right. However, there is little doubt that the PPF will hasten the demise of many defined benefit schemes.”

Templeman slammed the way the government backed down to trade unionists over public sector pensions, allowing present staff to retire at the age of 60.

“Just when the private sector is forced to dig deeper by the PPF levy, the government cannot back off reforming public sector defined benefit schemes,” he said.

“Public sector defined benefit schemes are simply not sustainable without radical reform – the government must get its own house in order.”

Professional services firm PricewaterhouseCoopers warned companies to move quickly to take advantage of new guidance to reduce their levy, as the PPF’s levy determination will be based on data in effect on (and information provided to them by) 31 March 2006.

Marc Hommel, pensions partner at PricewaterhouseCoopers, said the PPF has made two fundamental changes that employers can take advantage of:

– The reorganisation of rating bands into 100 categories, rather than the previous 10, means that even small actions by employers can result in a change in their scheme’s levy amount.

– The PPF is prepared to take parental covenants and other contingent assets into account, which could mean a significant reduction in the amount of their scheme’s levy.

“Employers should be deciding now what action to take and move quickly in the limited time they have available to put the right arrangements in place, to gain the necessary agreements with the trustees, and to provide the appropriate paperwork to the PPF for them to take everything into account,” Templeman said.

“Actions to positively influence the levy could include plugging an existing deficit, providing parental guarantees to the pension scheme trustees, and/or providing charges over contingent assets such as property.”


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