The Pension Protection Fund (PPF) has launched its consultation on the 2024/25 levy. The consultation proposes that the PPF will collect an estimated £100m in levy for 2024/25.
Reduced levy burden for 2024/25
This £100m estimate represents a 50% reduction from the 2023/2024 estimate of £200m. Since 2021/22 the levy the PPF aims to collect has been reduced by nearly 85%.
The proposed reduction is a reflection of the PPF's strong funding position, with improved financial resilience and greater reserves, and is consistent with the strategy published in Autumn 2022 to transition to a lower levy. Some small tweaks to the previous year’s methodology have been made in order to achieve the £100m estimate. The press release advises that "99 per cent of all schemes" are expected to see their levy fall in 2024/25.
However, those hoping for the year on year levy reductions to continue in the future may find themselves disappointed. PPF CEO Oliver Morley indicated that, barring significant changes to the risks it faces or to the legal framework it operates within, the PPF "plans to ensure the levy remains at or above £100m" in future years. Two key reasons for this are cited in the consultation:
- the PPF’s governing legislation makes it necessary to continue to collect a levy “to mitigate against any unexpected funding challenge”; and
- pursuant to the Pensions Act 2004 (s177(5)), the extent to which the levy can be increased from year to year is limited to a maximum of 25% of the previous year’s levy.
The consultation makes clear that, but for the legal requirement to charge a levy and the restrictions on how much it can be increased each year, the PPF Board would anticipate being in a position to move to charging no levy at all in its current funding position.
The Board has concluded that £100m is the lowest level at which it is able to safely set the levy within the current legislative framework. It says that the figure represents “a compromise between the need to retain an ability to respond to adverse events and the possibility that the levies collected might not be needed”. It is noted in the consultation paper that the DWP’s December 2022 review of the PPF recommended reviewing legislation around the levy and the Board is supportive of this conclusion – not only in respect of potential changes that could be made to allow further levy reduction, but also in relation to better distribution of the levy amongst levy payers.
Future levy years
In the context of improved funding positions and, in particular, increasing smoothed bond yields leading to a reduction in the measured liabilities of schemes, in order to maintain the proposed £100m levy in future years, the PPF advises that changes to the methodology will need to be made. This will be needed so as to avoid an increased risk-based levy burden being placed on an ever-decreasing number of schemes.
To this end, the consultation sets out various options for changes to how the levy is distributed in future years. It notes that it is not looking to reach any conclusions at this stage, and that it expects to return to proposals for 2025/26 and beyond in future consultations, at which point there will also be more data to show “how risk in the DB universe is in fact evolving”.
The consultation runs for seven weeks and closes on 30 October 2023.
- PPF Statement (11th September 2023)
- PPF Annual Report and Accounts
- PPF Consultation: Levy rules 2024/2025
Future of the PPF
The PPF is making this year’s levy arrangements against a background of a changed economic picture for many schemes and their sponsors. There are also potential important developments in policy that may affect the PPF and how it views risk. These include suggestions that the PPF could run a consolidator vehicle in order to assist in meeting the Government’s objectives on productive finance, an idea that the PPF itself backs. Increasing focus on governance of schemes and management of risk through the Pension Regulator’s new General Code (once released) and the final version of the new DB funding code will also have longer-term implications for the PPF.
This blog was written by Louise Pettit and Luke Parry-Billings
“The current legislation was intended to protect levy payers from sharp increases in the levy; however, it also effectively constrains how low we can allow the levy to fall without damaging our ability to respond to a funding challenge should one arise.” Oliver Morley, CEO, Pension Protection Fund