UK - The Pension Protection Fund (PPF) will base its new risk based levy on pension scheme underfunding and insolvency risk under proposals published by the board.
The PPF said the scheme's level of funding will be measured by taking account of the difference between the value of its assets and its liabilities to the PPF.
To promote fairness and the use of best evidence, the board is tendering a legislative change to require all eligible schemes to provide valuations on a PPF basis (s179 valuations) by the end of next year.
The board intends to measure the insolvency risk of sponsoring employers of eligible schemes by using a market solution provided by a credit specialist. The PPF will then estimate the one year probability of insolvency of the sponsoring employer.
Lawrence Churchill (pictured), PPF board chairman, said the board intended to build on broad industry support to develop “a transparent and objective method”.
Churchill said this would help calculate a credible and robust risk based levy that was both fair and proportionate.
He said: “We are proposing a relatively simple and transparent structure using familiar market techniques which should inspire confidence and accelerate the timetable for implementation.”
The PPF is also proposing that the risk based levy will be capped at a fixed percentage of liabilities to protect weaker schemes.
“We are aware of concerns about the potential financial impact that the levy may have on schemes and their sponsoring employers, and are therefore proposing to cap the amount of risk based levy payable by individual schemes, Churchill added.
Over the next few months, the board will be doing modelling work to determine the levy estimate for 2006/07. Partha Dasgupta, the PPF’s director of investment and finance, said: “Our approach is groundbreaking and yet uses accepted capital market techniques on which we can build further sophistications if required in the years ahead.”
However, on hearing the proposals Stephen Yeo, a partner of Watson Wyatt, said: “While this will be welcomed by employers with good credit standing, it will have significant consequences for the weakest employers, who could have to pay an annual levy of as much as 3% of their protected pension liabilities.
“The proposals for sharing the cost of the levy among schemes seem generally fair but will be unaffordable to some employers.
More ominously, the PPF has also admitted that the aggregate levy is likely to be more than its previous estimate of £300 million each year. Remarkably, it notes that every single independent estimate of the required levy has produced an answer higher than the figure produced by the Government to support its contention that the Pensions Act would be cost neutral.”
Currently, the Pensions Act 2004 prescribes that at least 80% of the pension protection levy must be risk based, and that when setting the risk based levy, the PPF board needs to consider the level of scheme funding and the likelihood of sponsoring employer insolvency.
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