Hundreds of schemes might be overpaying on their PPF Levy
26 February 2016
In 2005, when the Pension Protection Fund (PPF) was set up, the thinking was progressive but simple. The objective was to create a lifeboat fund for UK defined benefit occupational pension schemes, funded by compulsory insurance premiums, to protect the UK’s defined benefit pension scheme members.
In 2011, the PPF introduced a change to the approach to calculating levies. For the first time, the new approach took into account the investment risk that a pension scheme is running. The motivation for this change makes perfect sense – charge higher premiums if the risk to the PPF is higher.
The PPF had to come up with a simple but effective way to implement this. As a result of the simplification, many schemes that have taken steps to reduce their exposure to some of the most significant financial risks, are likely to be overpaying on their PPF Levy.
The PPF recognises this and has encouraged pension schemes that use derivatives to protect against movements in interest rates and inflation expectations to submit a bespoke calculation to the PPF, rather than relying on the PPF’s simplified calculation. From several recent conversations, it appears that many schemes aren’t aware of this bespoke calculation. As a result, the PPF Levy that these schemes (and ultimately their sponsors) are paying is higher than it should be.
Schemes that have liabilities of more than £1.5bn are required to submit bespoke stress calculations as a matter of course - the PPF wants to make sure that it is accurately assessing the risk it faces from these pension schemes.
However, where this route is optional (i.e. for schemes that are smaller than £1.5bn) many schemes will benefit from getting a more accurate assessment of their risks by submitting bespoke calculations to the PPF. Clearly, the economics have to work – i.e. the Levy savings must outweigh the additional costs of carrying out and submitting this bespoke analysis - but I suspect that in many cases this route has simply been overlooked.
If your pension scheme uses Liability Driven Investments, whether in the form of derivatives or even longer dated Gilts, take a look to see whether your PPF Levy could be reduced by submitting bespoke analysis of your own.
If you would like to discuss this further, please feel free to contact me or your PwC advisor.
Tel: +44 (0)121 265 6616+44 (0)121 265 6616