The Pension Protection Fund has today published its draft levy rules for the 2024-25 levy (to be invoiced in autumn 2024). Continuing the trend in recent years, the PPF expects to collect £100 million, half of that estimated for 2023-24, with almost all (99%) levy payers expected to see a levy reduction.
Given restrictions in legislation on the PPF’s ability to increase the levy from one year to the next, the PPF states that it plans to remain “at or above £100 million in future years” – at least until such time as those legislative restrictions are amended. It also adds that “more substantial changes are likely to be necessary to maintain a levy of £100 million in future years”, reflecting the expectation that the number of schemes that would otherwise pay a risk-based levy (RBL) would continue to decline. It explores some options in this regard within this consultation.
Unlike previous years, the PPF has not published draft appendices and guidance documents on the various core topics – such as transfers, contingent assets and transformation – rather, it has incorporated detail of the proposed changes in the consultation document. The PPF comments that this is because the changes to the levy rules are “limited”. However, they do have broad consequences, on which we have commented below.
What are the main proposals for 2024-25?
- Collect £100 million total levy, rather than a smaller amount that is, arguably, justified by the current funding positions of schemes and the PPF itself, in order to retain the ability to increase levies significantly in future if needed.
- Increase the Levy Scaling Factor (LSF) to 0.40 from 0.37 – in order to ensure that the £100 million is raised.
- The scheme-based levy (SBL) multiplier reduced to 0.0015% from 0.0019%, reducing SBLs by over 20% compared with 2023-24, in order to ensure the SBL is no more than 20% of the total levy – as required by legislation.
- Continue use of A10 s179 assumptions rather than moving to A11; which would otherwise reduce the levy by around £20 million and reduce the pool of levy payers by around 20%.
- The risk-based levy cap will remain at 0.25% of protected liabilities. Due to the overall reduction in RBLs, the PPF expects that no schemes will need to have this cap applied in 2024-25.
- No changes to asset stresses (following some significant changes last year), but the PPF will continue to monitor volatility. However, the PPF will work with the Pensions Regulator to improve Exchange help files to clarify how assets should be reported.
- Possibly reduce the three credit rating agencies (S&P, Fitch and Moody’s) to two.
- A simplification in the processes required for Special Category employers (those who are part of government, the Crown or established by legislation, and present a low risk to the PPF).
Future years
Largely as a consequence of the expectation of continued funding improvements and a declining population of RBL payers, the PPF expects to make more significant changes in order to maintain a £100 million levy in 2025-26 and subsequent years. It also intends that these changes will help to spread the burden across more schemes, otherwise use of increases to the LSF would mean that, in order to maintain the 80/20 RBL/SBL split, an increasing burden would fall on “a minority of schemes”.
Some measures under consideration:
- Consider a very streamlined insolvency scoring model or use of “off the shelf” credit scores instead of the existing bespoke insolvency risk model, or
- Use of covenant related information from the Pensions Regulator under the new funding regime – if this can be proven to be predictive, and/or
- Consider measuring the risk of a single dominant employer only, in the case of multi-employer schemes
- An overhaul to how they “collect, manage and manipulate scheme data”, although any changes would likely not be made until 2026-27
- Keep their Alternative Covenant Schemes methodology under review in light of Superfunds development.
In order to ensure that the RBL continues to be paid by a substantial proportion of levy payers, the PPF considers additional options to maintain a levy of £100 million, focusing mainly on:
- Increasing investment stresses to two standard deviations. The PPF expects well-hedged schemes to see a limited change in their levy, whilst schemes with growth-seeking portfolios seeing larger increases. Despite this, the PPF does not expect this to have an adverse influence on investment strategies as the increased levy would likely be small compared to the increased investment return; and/or
- Introducing an additional factor to increase liabilities consistently across all schemes, before calculating underfunding, which would serve to reduce the number of schemes that would not need to pay a RBL.
The consultation closes at 5 pm on Monday 30 October 2023, with the intention to publish the final rules – as usual – in December 2023.
