09 November 2006
Claims on the Pensions Protection Fund are running well above
the levies it is collecting, according to data from its annual
report, and Mercer Human Resource Consulting believes that levy
rises are inevitable as the real cost of the Fund emerges.
The Board of the Pension Protection Fund (PPF) has published its
Annual Report and Accounts for the 2005/2006 financial year. The
figures show that only £324m is likely to be collected in
2006/7 - little over half of the £575m targeted. Claims for
2005/6 were £485m, of which only a quarter (£138m) was
covered by levies, and there is little sign of lower claims for
2006/7.
Tim Keogh, Worldwide Partner at Mercer, said: "There's a big
undershoot here that can't go uncorrected. If there is a shortfall
during times of few corporate insolvencies, the levy must be
unsustainably low."
The final cost of the PPF, which is met by pension schemes with
solvent employers, will only become known over a decade or more,
with much depending on the economic cycle. But with little evidence
that the risk of schemes claiming on the PPF has reduced and a
deficit in the first couple of years in operation, there will be
pressure for levies to be cranked up.
Some of the shortfall is a result of schemes using strategies to
reduce their levies. Whilst some of these, like lump sum
contribution payments, reduce the risk to the PPF, many do not.
According to Mercer, the PPF will have to consider increasing the
level of levy applying for 2007/8 when it consults in a few weeks'
time.
Mr Keogh said: "Scheme sponsors will be unhappy if their efforts
to manage down their levies just result in an increase in the tax
rate. The PPF will need to work hard to ensure that any increases
are seen as fair, with the bulk of the burden falling on those
schemes that pose the most risk. We could easily see the
risk-related part of the levy doubling in the next year unless
there is more effort to close loopholes."
Mercer believes the PPF has made a reasonable effort to set up
an untested and unique system from scratch, but this system needs
to become more robust and durable, ensuring that all schemes are
valued consistently and all employers are assessed for risk on a
basis that commands confidence. The work the PPF has already
announced it is doing with its risk assessor (D&B) is
particularly welcome in this respect.
A consequence of the 2006/7 undershoot is that a much higher
than expected proportion of the total levy - perhaps 35% - will be
collected on a basis that does not include risk. According to
Mercer, this is a move in the wrong direction. Mercer believes the
best mechanism for protecting the PPF from high claim levels in
future is for its levy to incentivise higher funding levels, but
the more the levy is independent of risk, or the more it allows
trustees and employers to control how the risk basis will apply to
them, the less likely this is to happen.
