Following a review of its long-term funding strategy, the Pension Protection Fund (PPF) has launched a consultation on the 2023/24 levy rules and announced that almost all PPF levy payers will see a reduction in their levies from next year onwards. In light of its strong funding position - driven by strong investment performance and a reduction in risk - the PPF expects substantial reductions in the levy from 2023/24 onwards and has encouraged schemes to use any savings from the reduced levy to "further strengthen" their position.
A new funding strategy
Noting that, as of 31 March 2022, the PPF had reserves of £11.7 billion, the recent funding review concluded that the PPF has entered a new phase in its funding journey – known as the "maturing phase". This means that the PPF is now in a position to reduce the levy without risking the long-term security of current or future members. In this phase, the PPF states that its focus will shift from building to maintaining financial resilience.
The PPF has acknowledged that its funding position relative to its "Financial Resilience" test may vary from year to year. However, the expectation is that on balance and over time its overall funding position will improve further. On this basis, the PPF is proposing to significantly reduce the rate at which it collects the levy, while at the same time ensuring that a higher levy can be reintroduced if required.
The outlook for 2023/24
In line with the shift from growth to maturity, the main proposed changes to the PPF's levy for 2023/24 are:
- A reduced levy estimate of £200 million which is £190 million less than the 2022/23 estimate, and £420 million less than the estimate for 2020/21.
- To reduce the sensitivity of the levy to insolvency risk by adjusting the levy rates that are applied to each levy band. This change is intended to limit levy volatility from year to year if an employer's insolvency risk changes.
- A reduction in both the levy scaling factor and the scheme-based levy multiplier.
Looking to the future
To support further reductions to the levy in years to come, the PPF is currently working with the Department for Work and Pensions to explore the prospect of legislative change which would enable the PPF to raise the levy again more freely. The PPF has also started to engage with stakeholders on how to turn their broad design principles into more detailed plans.
The consultation is due to close at 5pm on 10 November 2022. Trustees and sponsoring employers should discuss the potential impact of the proposed changes with their advisers and continue to monitor developments in this area.
If you would like to discuss anything raised in this blog, please get in touch with a member of the pensions team.
