The DWP has published a consultation document on draft regulations imposing substantially increased scheme levies for 2008/09. Other regs are to allow the Board of the Pension Protection Fund (PPF) to pay risk-based administration costs. Recently too, the PPF Board published the rules it proposes to apply in determining the PPF levy over the next three years.

The draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2008 increase the PPF administration levy on defined benefit schemes by 17 - 20% on the rates for the year ending 31 March 2008. The figures range from a flat rate of £42 for schemes with fewer than 12 members up to £1.29 per member (min. £18,400) for schemes with more than 10,000 members. The increase aims to eliminate a PPF deficit of £2.7m from 2007/08 arising from a shortfall in levy collected (not so many schemes in existence) and a budget overrun due to staff expansion. PPF running costs for 2008/09 are estimated at £19.9m.

The new levy table is bravely set to apply "for each financial year ending on or after 31st March 2009" - in previous years, the figures have applied just for one year. History to date suggests that further amendments to the rates are likely next year.

The draft Occupational Pension and Personal Schemes (General Levy) (Amendment) Regulations 2008 increase the general levy on occupational and personal pension schemes for 2008/09 by 30 - 40%, mainly to meet the costs of the Pensions Regulator (TPR), and also the Pensions Advisory Service (TPAS) and the Pensions Ombudsman (PO). This hike follows a doubling of the levy last time it was increased in April 2005. Occupational pension schemes with fewer than 12 members will pay a flat rate of £33 (up from £24). The largest schemes with 10,000 or more members will be charged £1.00 (up from £0.74) per member, subject to a minimum of £14,300 (currently £10,600). Personal pension schemes of the same largest size will be charged £0.40 (up from £0.30) per member with a minimum of £5,700 (currently £4,000) applicable.

The new rates are designed to cover annual running costs of TPR (£29.8m), TPAS (£3.1m pa) and the PO (£2.7m), but about two-thirds of the total increase is to help clear an accumulated deficit to date of £20.8m, which is to be eliminated over three years. Unlike the PPF, the DWP offers no explanation for this deficit.

The draft Pension Protection Fund (Payments to meet Risk-based Administration Costs) Regulations 2008 make the costs of PPF compensation record-keeping chargeable to the fund itself, rather than being met from the PPF administration levy (and therefore, indirectly, all sponsoring employers). These costs are bound to rise in future years as more and more schemes enter the PPF.

The deadline for comments on this DWP consultation is 31 January 2008

Proposed PPF levy for 2008/09

Potentially much more significant in its impact upon defined benefit schemes is the Pension Protection levy, 80% of which is risk-based. In response to its August 2007 consultation, which drew fifty responses, the PPF recently announced its proposed modus operandi for the PPF levy over the next three years (2008/09 - 2010/11).

The 2007/08 target of £675m has been retained at least for 2008/09, but controversially the funding limits at which schemes pay a reduced risk-based levy (RBL) are to be raised from 104% to 120%, and at which they pay no RBL at all from 125% to 140%. This will come as a blow to employers who have striven to provide additional funding, and are now to find the bar raised even higher. Although technically still a draft, the PPF is quite clear that these are "firm proposals" and no "fundamental changes" should be expected.

The PPF says it’s trying to make the levy fairer as well as stable. Another significant change proposed is to reduce the cap on the RBL from 1.25% to 1% of section 179 liabilities for 2008/09, to continue to protect the weakest 5% of schemes from disproportionately high levy bills. The scaling factor in the RBL calculation, which in 2007/08 is 2.47 and for 2006/07 was 0.53, is to be set at 1.6*, but it is too early to tell whether this represents true stabilisation. The scheme-based minor component (£135m) of the levy is to be slightly reduced from 0.016% to 0.0152%* of the scheme's protected liabilities as at 31 October 2007.

* these figures are described as "indicative and likely to differ when the final determination is published".

For the 2008/09 levy, the insolvency risk will be taken as at 31 March 2008 and the same date retained in the following year for both the funding level and insolvency risk. However, for 2009/10 the PPF will consider contingent assets and deficit reduction contributions if they are made by 31 March 2009 and 7 April 2009 respectively.