UK - Pension funds will have to pay £575m to the Pension Protection Fund (PPF) next year, significantly more than the £300m figure touted earlier by government.
The announcement was made today after the PPF published its risk-based levy proposals for 2006/07.
Lawrence Churchill, chairman of the PPF board, said protecting people against insolvent pension schemes could not be provided at a lower cost.
But companies that took steps to lower their risk over the next few months would lower the proposed £575m levy, added Churchill. ”Schemes and their sponsoring employers now have the information they need to reduce their risk and benefit from a lower risk based levy than if they take no action,” he said.
But while the levy was notably higher than parliament expected, some segments of the market say it is still far too low.
Martin Slack, senior partner at actuaries Lane, Clark & Peacock said: Twice as much as parliament was lead to believe would be required, but perhaps only half of what may actually be needed. Where will the other half come from?”
“Together with the scheme funding code of practice, this helped to give greater security for members' accrued benefits, but the additional costs will inevitably accelerate the closure of DB plans.”
Churchill said the proposals struck the right balance between security for pension scheme members and cost to the levy payer. ”They demonstrate our commitment to listen to and work with industry to develop a levy that is fair, simple and proportionate.
He also said the finalised proposals provided business with the clarity and certainty it had been asking for.
Donald Duval, head of Aon Consulting's actuarial practice, said the proposals showed the PPF Board had clearly listened to the pensions industry, and described them as a significant step forward.
But the level of benefits provided by the PPF was excessive, he said. “One key area is the fact that pensions in payment are uncapped – someone with a pension of £1m per annum would receive their full benefits under the PPF. This is a Government decision, not a PPF one, and we continue to be amazed that the Government has remained adamant that it wishes to provide this unlimited protection,” he said.
Punter Southall also broadly welcomed the PPF changes to the way in which the risk-based levy will be calculated from 2006 onwards. The actuarial consultants made particular reference to the decision to replace the ten bands of insolvency risk originally proposed with 100 bands corresponding to each individual ‘failure score’ from 1 to 100. However, Punter Southall warned the use of 100 bands for insolvency risk could introduce spurious accuracy, unless concerns about the methodology used by Dunn and Bradstreet* in assessing failure scores for the levy were allayed, said David Cule, Principal at Punter Southall. “Under the ten band system, we were seeing companies for whom a difference of only 1% on their failure score could more than double their risk-based levy,” said Cule. “Using a separate probability for each percentage individual insolvency score is a sensible solution that considerably reduces the cliff-edge effects.” But Dunn and Bradstreet used a complex and secret model that takes account of a large number of different factors, added Cule. While the PPF had published a list of the factors on which Dunn and Bradstreet based their failure score, there was no indication of the relative weight given to each of the factors, he said.
“This means that companies unhappy with their failure score do not know the best action to take to improve their failure score and hence reduce their risk-based levy. Without transparency on this issue, the allocation of companies to 100 risk bands has all the appear
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