Government should allow PPF to end

Mercer, PPF, Deborah Cooper, pensions, PPF levy

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Contact: Alistair Peck
Tel: +44 20 7178 3143




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Government should allow PPF to end and reduce compensation payments

UK
London, 3 March 2010

Mercer believes that the Pension Protection Fund (PPF) should consult on the circumstances in which it could end its practice of automatically increasing compensation payments. The consultancy also believes that the PPF should also consider when it would use its option to ask the Secretary of State for Work and Pensions to reduce compensation payments to help ease the pressure on the UK’s defined benefit pension schemes.

The 2010/11 levy year will be the last covered by the PPF’s three-year commitment to keep the total levy collected stable, says Mercer. The firm expects the PPF to address this in its autumn consultation on the 2011/12 levy, but it also has outstanding plans to amend the levy formula to address investment risk, so employers and trustees have no certainty about how their exposure to the levy could develop over the long term.

According to Deborah Cooper, Head of Mercer’s regulatory team, “The PPF’s accounts suggest that it has a large funding deficit to fill, so for un-capped levy payers, larger increases are possible post 2010 to help fill this hole. While the PPF plays an undeniably positive role, we believe that as much consideration should be given to schemes that pay the levy as is given to scheme members that do now, or will in the future, receive PPF compensation. Schemes need a break.”

Employers are currently addressing the state of their own pension deficits either by asset allocation reviews, increasing contributions, or reconsidering the scheme’s benefit structure. Mercer believes that the PPF should do the same rather than simply assume it can increase the levy.

“When the PPF next consults with stakeholders about increases to the levy,” commented Ms Cooper, “it should ask for views about the circumstances in which increases in the levy should be offset by reductions in compensation.”

Each March the cap on the compensation paid to scheme members has been increased in line with average earnings but, for the past two years, the average earnings of private sector employees has increased less than the overall average. Mercer believes that, if the Secretary of State simply applies the average earnings index to the cap, then she will increase the level of compensation provided by the PPF relative to the amount of pension accrued by members of those private sector defined benefit pension schemes who contribute the largest share of the levy.

“Although the effect of freezing the cap would be small, it would be an important signal that the government has begun to realise it needs to limit the costs it has imposed on employers providing pension scheme providers through a series of thoughtless policy initiatives,” said Ms Cooper.

Notes for Editors

The PPF’s view is that it does not intend to reduce PPF compensation except in extreme adverse circumstances.