Pension Protection Levy proposed changes would not benefit schemes which have reduced investment risk through LDI strategies – PwC consultation response

Published at 10:11 AM on 13 February 2009

Proposed changes to the way the Pension Protection Fund (PPF) Levy is calculated would not give credit to pension schemes that have reduced their investment risk through certain liability-driven investment (LDI) strategies, says PricewaterhouseCoopers LLP (PwC).

In its response to the PPF’s consultation on the Future Development of the Pensions Protection Levy, which closes today, PwC welcomed the objective to reflect a scheme’s investment characteristics but warned of the impact from the trade-off between simplicity and accuracy in the formula.

Raj Mody, partner, PricewaterhouseCoopers LLP, commented:

"The PPF has a difficult task in trying to balance simplicity with accuracy in its levy calculations. As a result, the proposed changes would not necessarily reward those schemes that have taken steps to reduce their investment risk through certain liability-driven investments. At the same time, schemes which have taken more blunt asset allocation decisions may get undue credit, for example recognising bond investment even if those bonds are junk quality. PwC research shows UK pension schemes may have LDI covering assets well in excess of £100bn so this will be a material issue for some schemes.

“The omission also raises some pertinent questions about the cost vs. benefit of LDI strategies. If it is not simple enough for the PPF to reflect in its levy calculations, there is a question around how companies and trustees can be confident they are making well-informed decisions when adopting LDI techniques. With unprecedented market volatility and economic conditions, sponsors and trustees need to be careful that their decisions are not based on out-of-date analysis or historic measures - there is a danger otherwise that they are undermining their risk position rather than improving it.”


For more information contact:

Lydia Ruffles
Financial Services, PR Manager, PwC 
Tel:+44 (0)20 7212 1798 
Mobile:07966 319 780 

Raj Mody
Partner PricewaterhouseCoopers LLP 
Tel:020 7804 0953 
Mobile:07974 969320 


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