More work needed on PPF levy: Railpen

At the end of January, the Pension Protection Fund (PPF) announced a welcome and for 2025-26 from its initial £100m figure to £45m.

The move coincided with the announcing it was considering giving the PPF greater flexibility in reducing the levy by relaxing long-standing restrictions around how the levy is set.

In its statement, the PPF also confirmed it would introduce a new provision in its levy rules to effectively give it the ability to calculate a zero levy, if the DWP’s changes looked to proceed as expected.

The PPF’s decision to at least reduce this year’s levy to £45m will likely result in over £10m of levy savings for these schemes alone.

Tim Miller, Railpen

For defined benefit (DB) schemes like the railways pension schemes, these announcements reflect a necessary correction to a status quo that imposed unnecessary costs on schemes, their sponsors, and members.

In our collaborative discussions with policymakers, we have long argued the case for levy reductions and reform and the recent announcements demonstrate that the government is willing to listen to the pensions industry and make positive changes where needed.

While very supportive of the changes already announced, there’s still work to do to achieve a zero levy and we look forward to supporting the PPF and the DWP to deliver positive change and reduced costs for the pensions industry.

Why was reform needed?

The PPF protects members of DB pension schemes in the event of employer insolvency and is funded by an annual levy.

While the levy is set by the PPF, Section 177 of the Pensions Act 2004 currently dictates that the levy can only be increased by a maximum of 25% from year to year. This restriction provides a helpful level of certainty for levy payers, but it also constrains the speed at which the PPF can raise the levy in future years, and might effectively prevent the PPF from ever charging a levy again if it were to reduce the levy to zero.

The fact that this issue has grown in importance is ultimately a success story for the PPF. The PPF’s reserves have grown substantially in recent years as risk in the DB universe has reduced, but the PPF has felt unable to fully reflect its success in the level of the annual levy.

In its last two annual levy consultations, the PPF has proposed to charge an annual levy of £100m, despite noting that its Board would expect to be able to move to charging a zero levy in the absence of current legislative constraints.

This is clearly an undesirable outcome for everyone involved, not least levy paying pension schemes, their sponsors, and members.

The PPF and the DWP had been tasked with finding a solution to this legislative conundrum for some time.

Legislative change was a clear recommendation for the PPF and the DWP to develop in the 2022 Departmental Review of the PPF, and this was once again recommended by the Work and Pensions Select Committee’s DB inquiry in 2023 (to which a long-awaited government response is expected shortly).

Recent announcements from the DWP and the PPF are incredibly positive signs that reform is moving ahead. The railways pension schemes that our trustee board is responsible for pay a substantial proportion of the overall PPF levy, and the PPF’s decision to at least reduce this year’s levy to £45m will likely result in over £10m of levy savings for these schemes alone.

Looking ahead

The PPF’s announcement makes it clear that it will aim to remove this year’s levy entirely if it can gain the confidence it needs that legislative restrictions are set to be removed.

Legislative change must therefore be a priority for the government, with this year’s Pension Schemes Bill ideally placed.

At a time when UK growth and productive investment are high on the government’s agenda, businesses are facing additional costs, and pension scheme members are facing a cost-of-living crisis, a relatively simple legislative change that releases £45m of further resources would be universally welcomed across the country. 

Tim Miller is a senior manager of pension policy at Railpen.