PPF was 'caught out' by improved failure scores - EXCLUSIVE

The lifeboat fund has explained why the scaling factor for 2008-09 jumped to 3.77 in the "frequently asked questions" section on its website.

Hewitt Associates pensions consultant Lynda Whitney said: "It appears the indicative scaling factor published by the PPF was based on each scheme’s insolvency risk based on Dun & Bradstreet scores at October 2007, ignoring the March 2007 insolvency risk cap.

"This explains most of the discrepancy between the indicative and final scaling factors."

She said the PPF indicated in its August 2007 consultation that for 2009-10 levies onwards it would provide certainty in the previous November.

"Having undermined sensible planning in 2008, we expect them to deliver on this promise and to either significantly improve their scaling factor estimation or publish final scaling factors in November for the 2009-10 levy."

Watson Wyatt head of UK defined benefit consulting John Ball said the PPF had been "completely caught out by employers that managed to improve failure scores".

He added: "It looks as though the PPF thinks there are more improvements to failure scores on the horizon and has built in a buffer to ensure it won’t be out of pocket if companies appeal against their failure scores and get their levies reduced.

"Employers have paid billions to reduce deficits and some have given their pension funds further guarantees if things go wrong.

"These steps have reduced the risks faced by the PPF, and the PPF is claiming this demonstrates the incentives are being successful, so sponsors will be disappointed it has made no difference to the total amount of money the PPF plans to collect."

A Pension Protection Fund spokeswoman said: "When working out this year’s scaling factor, we had to take account of the significant volatility we have seen in scheme risk during the last 12 months – and make sure that we still collect the £675m we said we need to collect.

"However, back in November, we did highlight how the indicative levy scaling factor was likely to change significantly in our response to the levy consultation document."

She added: "But there are positives for those schemes who have taken positive steps to reduce their risk. What hasn’t necessarily been mentioned is that 42pc of schemes will be paying a lower levy bill in cash terms during 2008/2009 than they did in 2007/2008, while 9pc of schemes are expected to pay no risk-based levy during 2008 to 2009.

"We recognise that up until now pension schemes have had a difficult time trying to forecast what their individual levy bills will be. That is why from October we will be publishing a final levy scaling factor. This will not only give schemes the certainty they are looking for, but it will also give them six months to reduce their risk."