The Pension Protection Fund (PPF) has launched its consultation on the determination of the 2020/21 Pension Protection Levy.
While the consultation adheres to the PPF’s intention to keep levy calculations consistent within triennial reviews, it has confirmed that it expects the 2020/21 levy collection to be around 8% higher than the previous year. An anticipated deterioration in scheme funding levels, due to falling gilt yields and increased insolvency risks of the associated scheme sponsors, is expected to increase the levy collection from £575 million to £620 million.
This announcement follows a period during which the PPF received some of the largest potential claims since the fund was set up.
Areas of focus for feedback
Although no changes are being proposed to the overall levy calculation, and the levy scaling factor and scheme-based multipliers are to remain unchanged, there are a small number of alterations to the processes and guidance that have been proposed.
In particular, the PPF is requesting feedback on the following areas:
Schemes which have seen a deterioration in the sponsor Experian score directly attributable to guaranteed minimum pension (GMP) equalisation
Difficulties re-certifying contingent assets with a fixed cap under the new structure
The suitability of the less prescriptive guidance being proposed for assessing the guarantor strength in relation to contingent assets
Appropriate allowance for the introduction of the consolidator market in the coming years
The consultation closes on 5 November.
How the levy is calculated
While the total levy collected is expected to increase, the impact on individual schemes will depend on their specific risk characteristics. Schemes with a well hedged investment strategy and a strong employer are more likely to receive a levy that is relatively unchanged from last year. On the other hand, if a scheme has an unhedged investment strategy and/or the strength of the sponsor has been compromised, it is more likely to feel the effects of the anticipated increase.
An accurate calculation of the 2020/21 levy cannot be performed until April 2020 at the earliest, by which point market conditions and insolvency scores will be known. However, obtaining a levy estimate beforehand will allow sponsors and trustees to understand how the levy for their scheme is likely to be affected and make more accurate budgeting arrangements where changes are expected. Furthermore, it can identify opportunities to minimise the PPF levy.
Our pensions advisory team has the expertise to help you fully understand the background to your PPF levy calculation. We have a valuable combination of actuarial and accounting experience to analyse the financial information of both the employer and the pension scheme. This allows us to understand the detail behind every possible employer variable and how changes to these can reduce levies, both currently and in future.