PPF to slash levy by more than £400mn in two years

The funding review, published on September 29, concluded that the PPF had entered a “new phase” in its funding journey, which will see the levy reduced from £620mn in 2021-22 to £390mn in 2022-23, and then again to £200mn in 2023-24.

The levy reduction is achievable without risking long-term member security, and almost all levy payers will see a material reduction in payments next year, the pensions lifeboat noted.

The PPF stated it has grown significantly since its first long-term funding strategy was launched in 2010. That strategy established the goal of self-sufficiency by the PPF’s “funding horizon”, defined as the point in time at which the risk from future claims on the fund was low, estimated to arrive in 2030.

This is clearly fantastic news for levy payers, and we would encourage all companies to understand the implications of this change. For some, this will free up a large amount of capital that can be put to good use elsewhere

Lewys Curteis, Barnett Waddingham

To be classed as self-sufficient, the PPF would need to have sufficient reserves to protect the fund against future longevity and claims, with the estimate being that the lifeboat would need to be 110 per cent funded by 2030.

‘A high degree of confidence’

The review found that investment performance was well ahead of targets. Combined with levy collection and risk-reduction strategies, it has seen the PPF build up reserves of £11.7bn as of March 31, providing “a high degree of confidence” in the lifeboat’s ability to pay compensation in future.

PPF assets have also grown, now standing at £39bn. Some 42.1 per cent of this figure comes from assets transferred from pension schemes to the lifeboat, while 24 per cent is made up of investment returns, 22.7 per cent comes from the levy, and 11.2 per cent in the form of recovered assets secured from insolvent employers. 

The PPF’s strategy probability of success — being 110 per cent funded by 2030 — stood at 96 per cent as of March 31, significantly higher than the 83 per cent recorded in 2010.

The review acknowledged that funding levels among the schemes the PPF protects have been volatile, but stressed that the risk of underfunding had reduced in recent years, “as many trustees switch to assets that provide a better match to their liabilities and funding levels have started to improve”. 

“Despite this, there are still schemes that remain very underfunded and will likely present a risk to us for many years. Our expectation therefore is that while the risks we face are reducing, we will need to build our reserves (at a reduced pace) and retain them for some time yet,” the review explained.

Strong investment performance and reduced levels of risk have allowed the PPF to move to a new “maturing” phase in its funding journey, where the principal objective will be maintaining financial resilience, it continued.

“To meet the financial resilience test, reserves must provide a high level of confidence of being able to pay compensation to both our current and future members in full, without relying on investment returns and levy,” the review stated.

“Therefore, when we are funded above this level, we can expect that any further growth in reserves will come primarily from our investment returns. Our investment strategy may in time evolve to place more emphasis on protecting reserves from investment losses.”

The maturing phase is defined by three priorities with respect to target reserves. The first priority concerns annuity book reserves, or the cost of compensation above those expected in 90 per cent of modelled longevity scenarios.

The second priority concerns claims reserves, covering the cost of claims in a high number of modelled scenarios, and the third priority is for additional reserves to provide extra security.

The first two priorities are to be met through a mix of investment returns and levy payments, while the third is to be met primarily by investment returns.

The PPF will consider itself financially resilient when the first two priorities have been met, while the third priority is in part to counter the effects of a declining scheme universe, in which raising a material levy becomes more difficult.

PPF chief executive Oliver Morley said: “We are close to achieving our financial resilience target, meaning we can now start to actively take steps to bring down the levy without risking current and future members’ benefits. This allows us to share the positive impact of our strengthened position with the 5,200 schemes, and 10mn members protected by us. 

“We hope that schemes will use the reduction in their levy payments to further strengthen the position of their own scheme and improve the outlook and security for their members. We expect almost all schemes will see a reduction and that our reliance on levy will further reduce over time.”

Levy consultation

The levy reduction is accompanied by a consultation into reform of the levy system itself, an overarching principle of which will be “one of simplification for both the schemes we protect and for our own internal processes”, the PPF said.

Morley explained: “We believe a simpler levy would bring benefits for all stakeholders. We have consulted with industry experts as we continue to shape our proposals and are grateful for their contribution. We now hope that many more stakeholders will respond to our consultation and help us shape our future levy rules.”

Besides benefiting from investment performance and reductions in scheme risk, the consultation document explained that the PPF has also been taking steps to reduce the levy overall, as well as to change its distribution.

In the first place, reductions have been made to levy sensitivity with respect to changes in insolvency risk, principally by a halving of the incremental increase between levy bands. This is expected to reduce “the volatility of bills” and is “a first step to enabling a simpler approach to insolvency risk in the levy”, the consultation explained.

In the second place, the PPF intends to ensure “across-the-board reductions” by reducing the “levy scaling factor” by 23 per cent, and the “scheme-based levy multiplier” by 10 per cent.

The consultation into the whole suite of levy change proposals closes on November 10.

‘Fantastic news’ for levy payers

Responding to the announcements, Barnett Waddingham principal Lewys Curteis said: “The headline news is a sharp reduction in next year’s levy, with the PPF expecting almost all schemes to see a levy reduction due to the changes it is making to the calculation, with an average reduction of over 50 per cent.  

“Some schemes will see a much bigger reduction in their levy. This is clearly fantastic news for levy payers, and we would encourage all companies to understand the implications of this change. For some, this will free up a large amount of capital that can be put to good use elsewhere.”

Curteis highlighted the PPF’s warning about “a potential problem brewing” due to the rules around levy rises. However, legislation restricts the annual rise in total PPF levy collection to 25 per cent, so should the fund ever raise zero levy in future, it will never again be able to raise a levy.

“We encourage the DWP to consider this anomaly now before the PPF becomes hamstrung by the rules should its fortunes turn,” he said. 

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, also welcomed the lower levy, saying: “The PPF’s decision to announce a reduction in its levy underlines the PLSA’s assessment that, despite recent market difficulties, pension funds remain well-funded and a secure home for savers’ pensions.

“It’s very positive that the PPF is in such a strong place, given its important role in the sector and the wider economic challenges we currently face.”