Pension Protection Fund provides one year’s levy grace but warns of higher levies from 2022/2023

The Pension Protection Fund (PPF) has today broken with tradition by not setting levy rules for the next three years.  It has issued a consultation on how it will set levies for the next year only. Reflecting the Fund’s strong financial position entering the pandemic, it is offering a year of forbearance to levy payers. Just under 90% of schemes can expect to pay a lower risk-based levy next year. But the PPF warns of higher levies to come, driven by expected COVID-19 related insolvencies creating uncertainty for levy payers.

Emily Sturgess, Head of PPF Solutions at XPS said “Schemes and employers will be pleased to see the PPF’s measured approach in the short term to the impact of COVID-19 on schemes and the PPF itself. By not increasing levies now the PPF is providing much needed breathing space for those schemes and employers who may be struggling to deal with the fallout from COVID-19. But this leaves schemes and employers with as little as six months to take some actions to avoid large future increases in levies.”

The PPF issued its consultation, today 29 September 2020, on how it proposed to set levy rules for the 2021/22 levies, paid in autumn 2021. Key headlines are:

  • A £100m reduction on total expected levy raised at £520m.
  • The rules will only apply for one year and it will consult again in autumn 2021.
  • The risk-based cap is being reduced from 0.5% to 0.25% of stressed liabilities.
  • The PPF expects the impact of COVID-19 on the majority of employers to only start come through over next year as accounts are submitted.

The PPF is also making several changes to benefit smaller schemes. The new ‘Small Scheme Adjustment’ would see uncapped risk-based levies reduced by:

  • 50% for schemes with liabilities of less than £20m; and
  • between 0% and 50% for schemes with liabilities between £20m and £50m.

Emily Sturgess said “For a number of years the PPF has been looking for ways to help smaller schemes who pay levies that can be up to three times higher as a percentage of their liabilities than those of their larger scheme counterparts. Small schemes will no doubt welcome the new measures which provide them with meaningful support, particularly at these uncertain times.”

“Even with the reduction in the total levy there may still be winners and losers next year. Schemes that see a sharp increase in the insolvency risk of their employer may still see an increase or no reduction in their levy next year. The PPF has also made it clear that there could be substantial increases in levies for some employers from the 2022/23 levy year onwards. There are a number of actions employers and schemes can take now. Acting early can help schemes ensure they pay no more than absolutely necessary next year to benefit from the period of grace the PPF is providing. Importantly it can also help prevent large increases in years to come. Acting now is crucial to manage the uncertainty of how COVID-19 may impact levies long term.”

Pension schemes can take a number of actions to manage PPF levies including:

  • Reviewing the information held by the PPF’s insolvency risk provider Dun & Bradstreet and considering the impact of updating employer accounts
  • Reviewing the valuation used by the PPF to set levies
  • Using contingent support, particularly if a funding review is currently underway.