Pension protection fund levy
A bit of background first for any new readers of the BeeLines (and anyone else who hasnít been paying attention), just to put these new Regulations into context. The Pension Protection Fund, which Iíve written about a few times (and you can get up to speed with by clicking here and†here if you like) is going to be established on 6 April 2005. Thatís in just a few weeks time really (look in your diary if you donít believe me), and itís been a bit awkward so far to talk to employers and trustees about it without any of the nitty-gritty details having been decided on by Government. Details of the Pension Protection Fund are of great interest to solvent employers running final-salary pension schemes as they are the ones who will be required by the Pensions Act to pay money into the fund every year to bail out members of failed schemes. The good schemes run by good employers will be responsible for making good the pension promises of insolvent employers whose pension schemes are short of money when they are wound-up. They wonít have to pick up the whole tab as there is a limit to the amount of protection any individual will get from the protection fund, but the costs could still be substantial depending how things pan out in real life in the future. Obviously, if the number of schemes falling over in future rises substantially, or one or two really big ones bite the dust, then the diminishing base of solvent employers still running well-funded schemes could find that the cost of paying for other peoplesí pensions will become very expensive.
The way that the Pensions Act shares out these costs among good final-salary schemes is by imposing annual levies on them. There are going to be two types of levy, a per-member one and a risk-based one that will vary depending on how well funded any particular scheme is from time to time. Having announced this nearly two years ago, however, the Government guys have struggled a bit to work out exactly how the risk-based levy will work in practice and theyíve taken the easier option of putting off its implementation until A-Day in April 2006. [Thereíll be Regulations about that coming out about this time next year I should think]. So, for the first year of the Pension Protection Fundís existence it will only get the per-member levy going into its coffers.
The per-member costs that will be levied on schemes is obviously the easier one to determine, but weíve still had to wait until now to find out what it will be from this April. And, in a nutshell, thatís what this particular set of regulations is about, itís just filling in the details for us really.
To start with, every final-salary scheme will have to pay an administration charge every year and this will vary depending on the size of the scheme. But a minimum levy has also been set for some schemes. So for schemes with fewer than 12 members this annual charge will initially be set at £24. For schemes with between 12 and 99 members the charge will be calculated as £2.50 per member. Between 100 and 999 members it will be set at £1.80 per member (subject to a minimum of £250). Between 1,000 and 4,999 members it will be £1.40 per member (subject to a minimum of £1,800). Between 5,000 and 9,999 members at £1.06 per member (subject to a minimum of £7,000) and for schemes with over 10,000 members it will be set at the rate of £0.74 per member (subject to a minimum of £10,600).
Got that? Good! But thatís just the admin charge, the per-member levy is on top of that and is slightly easier to understand. That is being initially set at £15 for active members and retired members, and at the rate of £5 a year for each deferred member. Being lower for deferred members will be useful for the many mature schemes that tend to have far more people who used to work for them hanging around on their books than they have current employees.
So thatís it for now, except to say that the levy will apply to all final-salary schemes from April this year apart from public sector schemes run by the Government, but I donít want to talk about that because it winds me up.
4 February 2005
This document is based on Scottish Life's current understanding of the draft regulations The Occupational Pension Schemes (Levies) Regulations 2005.