UK - The Pension Protection Fund will use scheme investment risk for the first time to calculate the levy from 2012/13, it announced today.
The lifeboat fund said considering the investment risk of a scheme's portfolio when calculating the levy will give it a better handle on the differences in risk posed by schemes' investment strategies.
It said this approach protected the PPF if, for example, an employer goes bust and the PPF is exposed to potential declines in the value of scheme's investments.
The PPF will assess most schemes' investment risk for levy purposes by applying a stress test to the asset and liability values submitted in Exchange - The Pensions Regulator's system for schemes wishing to certify deficit reduction contributions, contingent assets and block transfers - to calculate the stressed funding position.
Schemes with section 179 liabilities of £1.5bn ($2.4bn)or more will be required to carry out a more detailed bespoke stress test of their assets and report their results to the PPF in their annual scheme return.
Smaller schemes will be given the option to choose whether they undertake this bespoke stress analysis.
The PPF outlined two stages in the bespoke calculation. The first applies a fuller list of stresses to assets which capture 20 subclasses, recognising more details of investments than those reported in Exchange.
The second stage applies to schemes with investments in derivatives, either directly or through a pooled liability-driven investment fund. Such schemes will then be able to reflect the risk-reducing qualities of these investments in the bespoke stress.
The PPF has published guidance on the bespoke analysis of investment risk for industry consultation, which will remain open until 24 June.
Elsewhere, under the new levy framework the PPF will smooth funding levels to reflect average assets and liabilities over a five year period; fix the levy scaling factor and the levy cap for three years; and increase the number of insolvency bands from six to ten.
PPF chief executive Alan Rubenstein (pictured) said: "We have worked closely with all our stakeholders in industry and elsewhere and we are grateful to everyone for their contributions. We are now embarking on the second leg of our journey - making sure the new framework is implemented successfully."
The National Association of Pension Funds said the new levy framework establishes a clearer link between a scheme's overall health and the amount of the levy it has to pay.
However, NAPF chief executive Joanne Segars added: "But we now need to study the details carefully. There is a concern about the costs of the new investment risk calculation for larger schemes. And some schemes with very good insolvency ratings will see their levies rise."
Meanwhile, Confederation of British Industry principal policy adviser Jim Bligh said: "The PPF's initial proposal over-simplified companies' risk profiles, so it is good it has adopted a more realistic assessment of firms' insolvency risk, which better reflects the reality of whether or not their scheme might end up in the lifeboat fund."
LCP partner David Everett said: "I suspect that will not take schemes much further forwards in being able to begin to estimate what their levy next year is likely to be. For this, I suspect we will need to wait for the consultation paper scheduled for the Autumn."
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