PPF levy calculation basis welcomed by advisers

Advisers have welcomed the Pension Protection Fund\'s decision to consult on including longer term risk in its levy calculations. The PPF says it wants the levy to in future be more specific to individual scheme risk. Levy bills are to be allocated more fairly using a less volatile formula and investment strategies will be taken into account when calculating risk, under proposals issued in November.

The PPF also confirmed that it has set a pension protection levy estimate of £700 million for 2009/10. It says this fulfils a promise made in August 2007 when it said that it would set a levy estimate of £675 million for the next three years, indexed to wages, so long as there was no significant change in risk. As also pledged earlier in the year, the PPF has confirmed a final levy scaling factor (which schemes can use to calculate their individual levy bills) of 2.22, in advance of the 2009/10 levy year.

The PPF stated that the decision to keep the same levy estimate as last year, indexed to wages, was not an easy one but is one that had to be taken to help reduce the burden on levy payers, particularly during the current economic downturn.

The PPF plan is to assess the probability of a scheme’s sponsoring employer going bust during a five year period – as well as separately assess the probability of it going bust during a one year period, as now.

It also intends to take account of the risk that a scheme’s investment strategy poses to the PPF when calculating its individual levy. Commentators had attacked the current approach to calculating risk as incentivising poorly funded schemes to take excessive risks with their investments.

PPF chief executive Partha Dasgupta, says: “Our levy payers have given us a strong message that the current system does not differentiate enough between schemes – and that levy bills should be less volatile.

“We believe our proposals will go a long way to answering these concerns. Also, we now have the best information about schemes that has ever been available – and this enables us to measure more accurately the short and long-term risks that individual schemes pose to the PPF.”