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Adviser  >  Technical Central  >  OPS Matters  >  The PPF Levy

The PPF Levy

The PPF was established by section 175 of the Pensions Act 2004 and became effective from 6 April 2005. Its aim is to compensate members of under-funded final salary pension schemes if employers become insolvent. The level of protection is around 90% of the scheme benefits although it does depend on whether the member is a pensioner or not.

The PPF will be financed through the collection of a levy from solvent employers. The levy is split into 4 parts, the scheme based levy, risk based levy, administration levy and PPF Ombudsman levy. In September 2006, the Board of the Pension Protection Fund started invoicing pensions schemes for the 2006/07 levy and for the first time, the risk based levy has been included. Invoicing will continue for a number of months so if schemes haven’t received theirs yet, don’t worry, they soon will!

The initial levy for 2005/06 was calculated based on the make-up of the scheme membership with a levy of £15 for active and pensioner members and £5 for deferred members. But for 2006/07, the levy will be calculated as 20% scheme based and 80% risk based. The risk based levy reflects the risk of a scheme making a claim on the PPF and will take into account the level of scheme funding and, crucially, the financial strength of the employer.

The PPF Board calculates underfunding by comparing the scheme’s assets with 105% of the liabilities calculated at PPF levels.

The PPF levels represent 100% of pensions already in payment but with no allowance for increases for benefits accrued prior to 6/4/1997 and a maximum of 2.5% p.a. for post 6/4/97 benefits. The remaining membership will receive 90% of benefits actually accrued with increases up to a maximum of 5% p.a. until a pension is paid reducing to 2.5% p.a. for post 6/4/97 benefits only thereafter. For 2006, compensation is capped at £26,050.

Different calculations exist where funding levels are above or below 104% of the PPF levels. The effect will be a reduction in the levy payment where scheme funding levels increases towards 125% and an increase where the level of scheme funding is less than 104%. Where schemes are funded to more than 125% on the PPF valuation basis, there will be no RBL to pay.

Credit rating (P)

Part of the RBL calculation involves an estimation of the likelihood of the employer becoming insolvent. Schemes will be given a Dun & Bradstreet Failure Score of between 1 –100 with 1 representing the greatest possibility of insolvency. Employers may want to check that they have no small debts outstanding as this may have a negative effect on the credit rating. Appeals against the credit rating score can be made directly to Dun & Bradstreet.

Contingent assets

Considering a contingent asset will have the same positive effect as reducing or eliminating debt, it will reduce the levy payment. A contingent asset is an asset that produces cash for a pension scheme contingent on an event (i.e.. insolvency) occurring to the sponsoring employer. There are 3 different types of contingent asset, parent company guarantee, security over securities and a letter of credit. The effect will be either a change in the insolvency risk factor or a reduction in the level of the underfunding included in the levy calculation, ultimately reducing the levy payment.

What’s next ?

PPF Levy Consultation 2007/2008 is underway about the 2007/08 levy payment. Any amendments will only concern the administration levy, which will increase significantly and the PPF Ombudsman levy which will be removed.

It’s important that when invoices are received, they're checked together with the data that the PPF used to work out the levy. A copy of the data will be sent with the invoice to make this job easier.

Queries on individual invoices can be directed to the PPF invoice enquiry PPF Levy Invoice Query e-mail address. 

Further information can be found on the PPF Levy 2006 info page - including sample calculations and example invoices.

Colin Dick

Marketing Analyst