Lower levy on the horizon as UK's PPF reviews calculation methodology

The Pension Protection Fund (PPF) is consulting on its levy rules for 2023/24, which will determine how it calculates the levy for invoices issued in autumn 2023. The PPF is proposing to collect £200m in levy in 2023/24, which is a reduction of £190m from that collected in 2022/23. The expectation is that almost all schemes will as a result see a reduction in their levy.

The PPF describes the significant reduction as the first step towards a materially lower levy in the future as a result of its strengthening financial position. The consultation considers the PPF's longer-term objectives to achieve a materially lower levy in the future.

Improved financial position

Alongside the levy consultation, the PPF has released its funding strategy review 2022. The review explains that the PPF, as a result of strong investment performance, reduced risk and levy collection, has built up reserves of £11.7bn. This provides the PPF with a high degree of confidence that it will be able to pay compensation due to members in the future.

The PPF's improved financial position means it can move to the next phase of its funding journey where it will look to maintain, instead of build, its financial resilience.

In light of the improved financial position, the PPF considers it appropriate to take active steps to significantly reduce the rate at which it collects levy (while ensuring it has the ability to charge a higher level in the future if needed). This change in approach means the PPF considers now is an appropriate time to reassess its methodology for calculating the levy.

Long-term objectives

The levy consultation sets out the PPF's proposed approach to reassessing the levy methodology to take account of its expectation that it will collect a much lower levy in the future. The consultation explains that the PPF's two key objectives are that the methodology needs to be flexible and it needs to be simpler and easier for schemes to engage with.

In light of those key objectives, the PPF is consulting on its proposed priorities for simplifying the methodology, which are that a new methodology should:

• have increased flexibility as to the amount of levy the PPF aims to collect each year (which is currently limited by legislation);
• have increased flexibility on the proportion of scheme-based levy that can be charged reflecting scheme size (which is again currently limited by legislation);
• rebalance the risk-based levy to emphasise underfunding and reduce the emphasis on employer insolvency risk;
• be open to different approaches to calculating the levy depending on scheme size (the PPF suggests a different basis could be applied to the largest schemes that could pose a systemic risk to the PPF).

The 2023/24 proposals

Taking into account the PPF's wider objectives, the main proposed changes to the PPF's levy for 2023/24 are:

• Setting a levy estimate of £200m (down from £390m in 2022/23 and £520m in 2021/22).
• Reducing the sensitivity of levies to insolvency risk by adjusting the levy rates that are applied to each levy band. This change is intended to reduce the volatility in levy from year to year if an employer's insolvency risk changes.
• Reducing the levy scaling factor, which is expected to reduce risk-based levies.
• Reducing the scheme based levy multiplier, with the intention of reducing the scheme based levy but increasing its proportion of the overall levy due from a scheme.

The consultation is open until 5pm on 10 November 2022.

Osborne Clarke comment

Trustees and employers should discuss this consultation on PPF levy and the funding strategy review and the potential impact of the proposed changes with the adviser that usually supports them in connection with their PPF levy.

The continued reduction in levy and the PPF's desire to simplify the levy is good news for defined benefit pension schemes. Trustees and employers should continue to monitor developments in this area as the PPF engages with the Department of Work and Pensions on potential changes to legislation to help it reach its objectives of a lower, simpler and more flexible levy.