In a world that looks very different than it did this time last year and with future economic uncertainty being all too real many people may be concerned about what the practical implications of COVID-19 will mean for the next Pension Protection Fund (PPF) levy year. The PPF's recently published levy consultation suggests that, for the 2021/22 levy year at least, any such fears may be somewhat unfounded.
For the most part, COVID-19 has had a limited impact on the PPF's proposed approach to the 2021/22 levy. Going into the pandemic "in a strong financial position" and in a bid to find a balance between the amounts the PPF needs to collect and the significant constraints COVID-19 is having on many employers' cash flows, the 2021/22 levy proposal is reassuringly similar to those of former years and could even result in a reduction in the levy for many. Understandably no assurances have been given regarding the levy in future years.
What do you need to know about the proposed 2020/21 levy?
The key changes proposed in relation to the 2021/21 levy include:
- a reduction in the overall levy the PPF expects to collect. Levy collection is expected to be £520m compared with £620m last year. This reduction is expected as a result of (i) the policy changes outlined below; and (ii) reduced scheme funding and increased insolvency risk being more than offset by more closely aligning section 179 valuations with current insurance pricing. Around 90% of scheme's are expected to see a reduction in this year's levy
- a departure from the triannual methodology approach. In order to give certainty to schemes and employers the methodology for calculating the PPF levy has previously been subject to a substantive review once every three years. This year would usually be the start of a new three year cycle. In order to allow the PPF sufficient flexibility to deal with the impact of COVID-19 over the next few years it is proposing to revert to a full review of the methodology on annual basis
- an adjustment for smaller pension schemes. Smaller pension schemes tend to pay a higher levy as a proportion of scheme liabilities. To avoid overstating the risk posed to the PPF, it is proposed that the levy will be adjusted so that small schemes (under £20m liabilities) could see a reduction of up to 50% in their levy. The adjustment will then be tapered so that a full levy will only be paid by larger schemes (£50m+ liabilities)
- a change to the risk-based levy cap. Currently capped at 0.5% of scheme's unstressed liabilities, it is proposed that the risk-based levy cap will be changed to 0.25% for all schemes (irrespective of size), bringing down the risk-based levy for those schemes with the highest bills relative to liabilities.
What's in store for the future
While this may be a good news (or at least not a 'bad' news) story for the 2021/22 levy, it is accompanied with a warning for future levy years. The true impact of COVID-19 will become known in future when published financial data reflects employers' experience during the pandemic. Accompany this with looming redundancies and an expected downward turn in scheme funding no assurances have been given regarding the approach to be taken in future levy years. Those employers who are expecting to see a worsening of their insolvency score can however expect to see that translate into a higher levy payment in future. It may be wise for employers to consider whether to take action now to mitigate against future levy increases, such as putting in place contingent asset arrangements.
The PPF is anticipating reverting back to its triannual methodology approach from 2023/24.
Responses to the levy consultation must be submitted by 24 November 2020 and may be made online. A consultation response is expected to be released in the new year.