The Pension Protection Fund levy looks set to reduce during 2021/ 22 according to a consultation paper put out by the organisation.
This paper proposes a reduction in the overall levy to £520m, and levy reductions for the smallest scheme, particularly those with less than £20m in liabilities.
In addition it is also proposing a lower cap on the ‘risk-based’ levy for schemes with the highest risk levels.
While this may seem like positive news for the DB pension sector, the PPF acknowledged that the effects of the Covid-19 pandemic are hard to forecast and there could be ‘substantial’ increases to this levy in the years ahead.
The PPF said that in order to assess the effects of this crisis it has decided that the normal process of putting in place a three-year plan will be on hold until 2023/24.
In the consultation docuement the PPF says: “For 2021/22, however, we expect Covid-19 will only have a limited impact on levy bills.
“This is because our insolvency risk model which we use to score the majority of employers uses accounts information filed with Companies House.
“Only when accounts are filed covering the period of Covid-19 will they feed through into insolvency risk scores. For the majority of our employers this won’t happen in time to impact levy scores used in the 2021/22 levies, the main effect will be seen in 2022/23 invoices.
“At that point, however, the effects could be substantial – with many employers seeing a worsening in their levy score”
LCP partner and former pensions minister Steve Webb says the real impact of the current crisis on the PPF is likely to come in 2022/23 and beyond.
He points out that some firms who will ultimately become insolvent have been supported by temporary government rescue schemes. And even when a firm becomes insolvent, the ‘assessment period’ for determining if it enters the PPF can easily last a year or more.
In addition, recent LCP research found, a key determinant of the impact of the crisis on the PPF will not be the total number of insolvencies but whether a small number of large schemes with large deficits enter at the same time.
There is some evidence to suggest that such schemes are more likely to be found in traditional industries which have been hardest hit by the current crisis.
Webb says: “There is no doubt that sponsoring employers will welcome the proposed reduction in the overall levy for 2021/22.
“Sadly, this is likely to be only a temporary respite. The impact of the current crisis on insolvencies has yet to be fully seen, not least because of temporary government support measures.
“As these unwind, we are likely to see more insolvencies and more claims on the PPF. These levies remain a key issue for sponsoring employers, especially for those with schemes whose funding position has deteriorated and whose covenant strength has weakened during the current crisis”.