Mercer has highlighted that Government can intervene to cap the Pension Protection Fund (PPF) levy to give defined benefit schemes breathing space from the impact of the government’s quantitative easing programme. The consultancy has pointed out that while the total increase in levies collected is capped at 25%, some schemes could be facing a higher increase. The consultancy has also noted that as the 25% cap is a legislative figure, it is within the government’s power to reduce it and so push the actual levy increase by the PPF down.
“In terms of the mechanics, there are two smoothing factors – one on liabilities and one on assets. While reductions in yields will likely result in a higher value placed on liabilities, the same is also true for some assets thereby dampening the liability effect. Typically, all other things being equal, mature schemes heavily invested in bonds will see little impact while younger schemes invested in equities will see a dramatic increase.” said Mike Fenton, Mercer’s UK PPF Leader.
“Whilst these macro level changes are important,” he continued, “our advice to schemes is to consider their own individual position. By way of example, a fall in D&B scores resulting in a single risk band change could result in a 50% increase in the risk based part of the levy.”
“The aggregate amount the PPF expects to collect cannot be more than 25% of the amount that it collected in the previous year. However, some schemes could suffer increases of over 25% and others may see no increase at all. The 25% amount noted in legislation is open to amendment. If the pensions minister, Steve Webb, wants to ease the financial burden on pension schemes due to current market circumstances, it is in the government’s gift to amend the ceiling. This could even be down to zero which would result in no increase at all in aggregate.”
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