Pension Protection Fund levy deadline approaches
March 2008
The Pension Protection Fund was set up under the Pensions Act 2004 to protect members of defined benefit pension schemes where the employer goes bust and its pension scheme can no longer pay out the pension.
It is partly funded by existing pension schemes which pay an annual pension protection levy, which is governed by their risk profile. The PPF also funds compensation to members through recoveries from insolvent employers of schemes they take on, the money on assets of schemes that transfer to them and returns on their own investments.
The pension protection levy is 20 per cent scheme based and 80 per cent risk based, the latter being based on a scheme’s underfunding risk, or how much the PPF would be liable for were that scheme to enter the PPF. In August 2005, Dun & Bradstreet were appointed to measure the insolvency risk of sponsoring employers of defined benefit pension schemes on behalf of the PPF. They produce a raw failure score from one to 100 with one being the lowest score and 100 being the highest. This is based upon a number of data sources such as public and audited accounts, trade payment data and the age and experience of the principals. Each of these failure scores map to a probability of insolvency, which is then inserted into the levy calculation for a scheme. Dun & Bradstreet measure insolvency probabilities at 31 March 2008 for the calculation of both the 2008/09 and the 2009/10 PPF levies.
Back in July 2005 there was an outcry from sector on grounds that the levy was an unfair ‘tax’ on charities because of the differences in income sources and capital structure and the credit scoring methods used. Almost three years on the levy still rankles. Phil Woodhead, CEO of the Institute of Occupational Medicine, told us: ‘Our PPF levy increased by over 850 per cent this year compared to last. If it stays at this level going forward, contributions to the scheme will need to increase by approximately 25 per cent in order to pay for it. We have serious concerns that this is not affordable, either for the members or for the IOM. Therefore a levy on this scale is effectively putting the scheme at risk of closure. The PPF is supposedly there to safeguard final salary pension schemes, not to drive them towards closure’.
The PPF has confirmed an updated methodology has been designed specifically for the non commercial sector and will be used for the first time in 2008. This new scorecard relies much less heavily on trade payment data. A spokesman for the PPF said, ‘charities will be pleased to know that Dun & Bradstreet have now produced separate scorecords for commercial and non-commercial organisations. This new scoring system will not only help assess different types of business, but will help improve accuracy to individual scores.’
Charities are advised to monitor their score closely, improve it where possible by reducing their risk profile and challenge it if they think it incorrect, plus of course ensure all relevant documentation is filed the due dates. The score cannot be amended retrospectively, so it is vital that schemes ensure their 31 March 2008 information is correct well in advance of this deadline as it will impact the 2008/09 and 2009/10 levy years.
Further information
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