The Pension Protection Fund is looking to reduce its annual levy to zero, reflecting the improved funding position of many defined benefit schemes.
In total the PPF now has reserves of more than £10 billion, and generates substantial returns on the assets which it manages so the levy is now only a relative small part of is overall income of the PPF. Modelling also suggests that levy funding is unlikely to be needed to meet future PPF liabilities on most assumptions.
This lifeboat fund usually makes a decision on the annual levy before the end of the year, but this will be delayed until January following consultation with the industry.
The PPF said it was working with the Department of Work and Pensions, as legislative change is needed to give the lifeboat fund greater flexibility, enabling it to set a zero levy.
LCP partner and former government minister Steve Webb says this decision to delay was a “glimmer of hope” for many in the industry. He points out that under current rules there is a cap on the percentage year-to-year increase in the PPF levy. This was originally designed to protect employers against sudden hikes in their bills. But this rule is now having the perverse effect that PPF is reluctant to further reduce or abolish the levy, because it would then be unable to reinstate it.
Chair of the PPF Kate Jones says: “We need to balance the needs of all our stakeholders with our financial responsibilities and have been actively considering a wide range of options. To allow more time for this work, including engagement with colleagues at DWP, the Board will conclude its decision on next year’s levy in January.”
“We recognise the need to minimise uncertainty for levy payers but trust taking the time to get this right will be viewed positively. Ultimately, we don’t want to charge the levy for any longer than is needed and are working towards this goal.”
The PPF said it will seek to publish its levy determination and rules for 2025/26 by the end of January.
Jones adds: “We recognise the vital importance of balancing both levy payer and member interests, and further government consideration of PPF and FAS indexation rules would be welcomed.
This decision has been welcomed by many consultants across the pensions sector.
Webb adds: “It is an absurd situation that a law designed to protect employers actually means that the PPF has to be cautious in cutting the levy even when it could afford to do so. The fact that a decision has been delayed suggests that things may be moving in the corridors of power and a more rational set of rules could be coming. This offers employers a glimmer of hope that a zero PPF levy might not be far away”.
Hymans Robertson head of pensions policy innovation Calum Cooper adds: “What a win it would be to release up to £100m of costs from UK business at a time when National Insurance costs are going up, and we need to invest more in UK growth. “
He adds:“There still remains debate around what is productive finance. With a £12bn+ surplus, paying £100m when it’s not needed is what productive finance is not. But the PPF is in a tough spot: what if they need it in the future? They need help to release capital productively and to commit to that in January. My wish is that the DWP can help give the PPF the confidence they need to reach a safe and sensible place on the future levy. It’s in everyone’s interests and would be a great win for government – one which is within their gift.”
Meanwhile the Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy Zoe Alexander adds: “This is at a time when pension funds are being asked to increase investment in productive assets and sponsoring employers are facing higher costs due to the increase in employer National Insurance contributions.
“The move keeps open the possibility of the PPF reducing the levy ultimately to zero, provided the DWP can swiftly commit to reforming legislation, as part of the Pension Schemes Bill, to allow the PPF to raise more levy should there be higher claims on it in the future.
“We also support PPF’s dialogue with DWP on further government consideration of PPF and FAS indexation rules.”
