PPF levy for 2021/2022: getting the balance right

• United Kingdom

• Pensions

07-10-2020

The UK’s pension lifeboat fund (the PPF) is asking for views on proposed changes to its levy rules. It published its consultation on 29 September 2020.

What changes are proposed?

The economic impact of the COVID-19 pandemic is putting pressure on many employers and schemes. Looking ahead, it seems likely that an increase in employer insolvencies will be coming down the track – potentially leading to more claims on the PPF in years to come.

So, it would be reasonable to expect the PPF to increase its levy collection for next year. But, perhaps surprisingly, this is not the case. The PPF plans to reduce its levy collection for 2021/22 to £520m. This is £100m less than the estimated equivalent figure for 2020/21.

Given the economic uncertainty, the PPF is also planning to move away from setting the levy rules for a three-year period. It says it wants to take a more flexible approach – so it can react on a year by year basis. It hopes to return to setting levy rules for multiple years from 2023/24.

The PPF also plans to extend the current payment flexibility for invoices to cover the 2021/22 levy year. The proposals would give schemes up to 90 days (without interest charges) to pay their levy invoice where the delay was because of the pandemic.

Is my scheme’s levy likely to go up or down?

The PPF says it came into the pandemic in a “robust financial position”. It also isn’t expecting the pandemic to have a significant impact on 2021/22 levies. In part, because insolvency risk scores (used in levy calculations) use backwards-looking data – covering only part (if any) of the COVID-19 period.

So, despite the increased risk of claims in future, the PPF hasn’t needed to dramatically change levy strategy or increase the amount collected. Instead, it has focused on addressing affordability for schemes facing the highest levy charges (as a proportion of liabilities) by making two key changes:

• small schemes adjustment: cutting the levy by 50% for small schemes with less than £20m in liabilities (and tapering this relief so only schemes with £50m+ in liabilities will pay the full levy)
• risk-based levy cap: reducing the cap on the amount of risk based levy paid by individual schemes from 0.5% to 0.25% of (unstressed) liabilities

The PPF expects the small scheme adjustment to impact close to 2000 small schemes with SME employers. The reduction in the risk based levy cap is expected to mean another 152 schemes will see their levy capped.

Overall, the PPF says it expects that under the 2021/22 levy rules “the great majority of schemes (around 90 per cent of those paying a risk-based levy) will see a reduction in levy compared to their 2020/21 invoice”.

Comment

The PPF says its focus is on “striking the right balance” between the amount it needs to collect in 2021/22 and the immediate challenges faced by employers and schemes given the pandemic.

This flexible, supportive approach is welcome news at a time when many expected levies to go up. That said, the PPF seems to be managing expectations for a more challenging future – with significant levy increases looking likely for the 2022/23 levy year.

It remains to be seen how the pandemic will impact employer insolvencies and scheme deficits, particularly as government support schemes fall away. But, for now, it seems that the PPF is getting the balance right and giving employers and schemes some much needed breathing space.

The consultation closes on 24 November 2020. The PPF expects to publish its final 2021/22 levy rules in January 2021, with invoicing starting in autumn 2021.