The Pension Protection Fund (PPF) published its consultation on the levy rules for the 2025-26 levy (to be invoiced in autumn 2025) yesterday. The PPF expects to collect a total levy of £100 million, which equals its lowest ever target and is in line with last year. The distribution of the total levy between schemes would change slightly based on the proposals, but the PPF expects only 5% of schemes that pay a risk-based levy to see an increase of more than 0.01% of their liabilities.
A levy collection target of £100 million is in line with expectations. Given restrictions in legislation on the PPF’s ability to increase the levy from one year to the next, the PPF stated last year that it planned for the collection target to remain “at or above £100 million in future years” – at least until such time as those legislative restrictions are amended. This year the PPF has added “we will continue to engage with the Government on legislative changes to enable us to reduce the levy further and even to zero. We will keep progress on this under review and not charge for longer than we need”.
Except in areas whether the changes are most significant (notably, the process for certifying Deficit Reduction Contributions), the PPF has not published draft appendices and guidance documents on the various core topics – rather, it has incorporated detail of the proposed changes in the consultation document.
What are the main proposals for 2025-26?
- 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.
- Prevent a decline in the pool of schemes that pay risk-based levies by amending some of the parameters within the levy calculations. Without these changes to parameters, the PPF estimates that the number of risk-based levy payers would decline by 40% (which would otherwise concentrate the £100 million levy collection upon fewer schemes).
- Widen the definition of contributions that can be certified as Deficit Reduction Contributions, to recognise that sponsors may pay contributions to a scheme without a Recovery Plan, for example in order to accelerate the path towards an insurance transaction, and also extending the simplified Option Beta certification option to all schemes.
- Make it easier for schemes with full insurance buy-ins to access risk-based levy waivers.
What technical changes are proposed in order to achieve these aims?
- Increase the scheme-based levy (SBL) multiplier to 0.0018% from 0.0015%, so that the proportion of the levy that is scheme-based is set to the legislative maximum of 20% (as in 2024-25).
- Reduce the Levy Scaling Factor (LSF) to 0.35 from 0.40, in isolation reducing risk-based levies.
- Base levies on the latest ‘A11’ version of the PPF’s s179 valuation assumptions, to take account of changes in buy-out pricing in the insurance market.
- Retain a cap on the risk-based levy of 0.25% of protected liabilities.
- Update asset and liability stress factors in the levy calculation to two standard deviations rather than one standard deviation. This is aimed at protecting the PPF from low-probability but high-impact downside scenarios. In isolation, this change would increase levies for schemes whose funding positions are less resilient to economic shocks.
- Further update asset and liability stress factors to include historical volatility data up to December 2023. This update would mean that the stress factors would incorporate the period of increased interest rate volatility in 2022 for the first time.
- Following the PPF’s change to using two rather than three credit rating agencies in insolvency scoring last year, update the mapping of credit ratings to levy bands and rates.
Changes affecting certain types of employer
The PPF has also included content in the consultation about certain categories of employer whose insolvency risk may be measured differently from the majority of pension scheme sponsors. In particular, the PPF has asked for stakeholder views on:
- Whether there are any types of employers that are not currently able to be recognised as ‘Special Category Employers’ but are similarly at very low risk of insolvency (currently, this includes organisations that are part of Central Government, the Crown, or are established by legislation or treaty).
- Whether it is appropriate to make a different set of amendments in relation to “Alternative Covenant Schemes” (meaning those which form part of a commercial consolidator and schemes without a substantive sponsor).
The consultation closes at 5 pm on Wednesday 23 October 2024. Please let us know if you would like a further discussion on these topics or support in responding to the consultation.
We expect that the final rules will be published in December 2024.
