In May, the Pension Protection Fund (“PPF”) published its new PPF levy framework that will take effect from the 2012/2013 levy year. This followed on from the PPF’s consultation in October 2010. Please note that, at present, the PPF levy only relates to members accruing defined benefit pensions.

The levy framework will continue to have a risk based and a scheme-based element. Most importantly, the factors used to determine the risk-based levy will be fixed for 3 years, except in extreme circumstances. This should provide more certainty when setting scheme budgets and agreeing contribution rates to cover scheme expenses.  

The most significant change from the October 2010 consultation involves the calculation of insolvency risk and the use of risk bands. The changes will now place each employer into one of ten (rather than six) levy bands. Placement in the bands will be based on the average D&B failure score of the employer on the last working day of each of the 12 months before the start of the levy year. Fortunately, the complex transitional provisions and averaging calculations that appeared in the original consultation have been dropped.

The next step is for the PPF to publish the draft levy determination for consultation this autumn and to include the risk-based levy scaling factor that is expected to fixed until 2014/15. The levy determination should be finalised by the end of 2011, although time is tight as the scheme return information needs to be submitted by 31 March 2012.  

Unsurprisingly, perhaps, it is widely anticipated that schemes with low-risk employers will pay more under the revised framework, unless their scheme is in the enviable position of being well-funded.

Technical Information

The PPF’s policy statement can be accessed at: http://www.pensionprotectionfund.org.uk/ DocumentLibrary/Documents/levy_policy_statement_May11.pdf