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What does the future hold for the Pensions Protection Fund Levy?

In around 2006-2007 the Pensions Protection Fund (PPF) introduced the world’s first risk based levy. It was launched with a target of raising £575m but only managed to raise £271million. As a result the levy in subsequent years was increased to raise £675m and remaining constant for the next three years, with the aim of raising £700m by 2009/10.

So, what has this money been used for over the intervening period? As of May 2009, 101 schemes and their assets have been admitted to the PPF. The average compensation paid out to members of admitted schemes has been £4000 per annum and the age range for recipients is 7 to 104 years. Total benefits paid out in April 2009 were £59,538,280.82 .

Of more importance is the fact that 313 schemes are waiting to see if they are going to be admitted to the PPF, representing a further 192,679 members. If the average payout remains at £4000 per annum and all these schemes are admitted to the PPF then its payroll is going to increase by £770 million pa.

At best then the PPF is going to become a pay-as you-go scheme with the amount that you are able to take out, in line with the amount that has been put in, similar to the State Pension system. This would therefore be a giant Government style scheme that is only able to increase levies to remain solvent.

The PPF likens itself to an insurance scheme and describes the risk based levy as being like an insurance premium (described as such in its policy 2008-2009 to 2010-2011 document).

Insurance companies have to ensure that they have secure capital levels and assets far in excess of their liabilities, however this does not apply to the PPF? What happens to every one receiving a benefit if the PPF becomes insolvent? It is not backed by financial compensation schemes, as an insurance company would be.

Since 1997 we have seen constant attacks from policy-makers on the final salary pension, so combined with the recent recession final salary pensions have become far and few between. We use to have a pension system which was the envy of the rest of the world, however it is now sinking under the weight of liabilities it is having to support and it is the companies who put in place good final salary pension schemes for their employees in the past who are supporting it.

Trigon Pensions and many others involved in this sector believe all parties responsible for the current situation should be helping to ensure that people do not face an unfair and difficult retirement, through no fault of their own.

Although it is no-one’s fault that the majority of people are living longer and that pensions are thus more expensive to provide, Governments must however take some measure of blame for the extra liabilities they have been imposed over the years via legislation.

However good the intentions were when the PPF was set up, we must question now whether it is fit for purpose. My colleagues at Trigon and myself believe that we seem to be heading for the ‘perfect storm’ whereby levies will have to be raised to enable the PPF to pay out promised benefits, and those higher levies may push more companies into bankruptcy and their employees into the PPF.

Further information is available on the Trigon Pensions Web site