Around 2,000 small schemes could see their levies cut as the Pension Protection Fund (PPF) consults on introducing a tapered approach to its risk-based levy while temporarily dropping its multi-year approach.
Schemes with less than £20m in liabilities will see their dues cut in half, while any scheme with less than £50m of liabilities will see a reduction, as the lifeboat fund bids to help employers cope with any financial difficulties arising from the pandemic.
In addition, the PPF said the cap on the amount of risk-based levy paid by any individual scheme would be cut from 0.5% of liabilities to 0.25%, with 90% of schemes paying this levy anticipated to benefit.
The PPF made similar moves on the risk-based levy following the global financial crisis, with a cut from 1.25% of liabilities to 1% in 2008/09, and then to 0.5% in 2010/11.
Alongside an update to its funding assumptions to better reflect improvements in buyout pricing, the compensation scheme said it now expects a £100m reduction in collected levy in 2021/22 as compared to this year.
Overall, the PPF said it expected to collect £520m of levy payments in 2021/22 - the lowest collection since 2006/07 when the corresponding figure was £270m.
The PPF said its "strong financial position" at the onset of Covid-19 in terms of both its surplus and investment strategy meant it was able to "avoid proactively increasing the levy" and these changes could be committed at "very limited overall cost".
While it has previously committed to a multi-year approach with unchanging rules over a period of three years, the PPF recognised that the pandemic meant it had to be more flexible and, therefore, it would set the 2021/22 and 2022/23 levy rules in response to market developments.
Also bearing in mind the changes to The Pensions Regulator's defined benefit funding code, it now does not expect a multi-year approach to return until 2023/24.
PPF executive director and general counsel David Taylor said: "The current environment makes setting an appropriate level for the levy particularly challenging. There is significant uncertainty about how claims and risks will develop so we've moved away from a multi-year approach to setting the rules. This means we can respond dynamically when setting the amount of levy we collect each year.
"In time we'll need to consider what further steps to take to ensure an appropriate levy in 2022/23 and beyond, alongside our review next year of the PPF's funding strategy. But for now, we believe the changes we're proposing for 2021/22 will provide valuable support to the schemes and employers."
Nevertheless, the reduction this year has been described as a "one-year grace" with government support for businesses severely affected by Covid-19 almost artificially propping them for the medium term.
The PPF recognised this issue, noting: "As these come to an end, we expect an increase in the level of insolvencies and a significant increase in claims on the PPF."
It said there was considerable uncertainty but it did not anticipate major impact on levy bills for 2021/22, instead expecting the main effect in 2022/23, when continuing solvent employers could see their levy score worsen and "all else being equal, this would lead to a rise in levy bills".
The PPF said it was monitoring the impact on its insolvency risk model, explaining that it was difficult to discriminate between those employers experiencing a short and limited impact and those who are at genuine risk of insolvency.
XPS Pensions Group head of PPF solutions Emily Sturgess said the lifeboat fund's "measured approach" was providing "breathing space" for the most adversely affected employers, but warned: "This leaves schemes with as little as six months to take some actions to avoid large future increases in levies."
She continued: "Even with the reduction in the total levy there may still be winners and losers next year. Schemes that see a sharp increase in the insolvency risk of their employer may still see an increase or no reduction in their levy next year. The PPF has also made it clear that there could be substantial increases in levies for some employers from the 2022/23 levy year onwards.
"There are a number of actions employers and schemes can take now. Acting early can help schemes ensure they pay no more than absolutely necessary next year to benefit from the period of grace the PPF is providing. Importantly it can also help prevent large increases in years to come. Acting now is crucial to manage the uncertainty of how Covid-19 may impact levies long term."
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