Some companies could see the levy paid to the Pension Protection Fund rise by £1m as a result of the Covid crisis, according to new analysis.
Data from pension consultants LCP suggests that general pension levies could treble, as it is expected that more firms will become insolvent, pushing more schemes into this rescue fund.
However it points out that while there will be a general rise in costs, some individual firms will face much bigger increases, particularly if their scheme deficit has increased or if their own solvency position has weakened.
This could lead to a significant increase in the ‘risk-based’ levy that firms pay. In some cases firms could see costs jump by £1m.
Each year, the PPF raises a levy on defined benefit pension schemes and in 2020/21 the total bill is set to raise £620m. These costs are often passed straight on to the sponsoring employer.
LCP warns that individual firms may face a ‘perfect storm’ of three factors which could lead to large increases in PPF bills.
This includes higher across-the-board increases to levies, should the overall funding position of the PPF deteriorates, due to increased corporate insolvencies. At the same time the funding of individual DB pension funds may have also deteriorated, due to asset values falling and a potential suspension of pension contributions, to ease employers’ cash flow during the economic lockdown.
To make matters worse firms in sectors that have been hardest hit by the crisis, may be judged to be a higher risk of going insolvent and this will increase the additional ‘risk-based’ levy they have to pay.
Firms are currently put in one of 10 bands according to their assessed risk of going insolvent, with Band 1 the lowest risk and Band 10 the highest risk.
A company that was in Band 4 before the crisis and saw a big economic hit to profits, turnover and cashflow could realistically find themselves in Band 7 at the next assessment.
LCP says that firms in Band 7 pay more than three times the PPF levy rate than firms in Band 4, such a change could lead to a trebling of bills, with some larger firms seeing million pound increases. The first increases would affect levy payments for 2021/22, though the full effect might not be felt for a number of years.
LCP partner Alex Waite says: “The Pension Protection Fund is strong enough to withstand the present crisis, but it is likely to need to raise more in levies, with some firms facing particularly large increases.
“A rise in corporate insolvencies will put increased pressure on PPF levies across the board. But individual firms could see a much more dramatic change. It is vital that employers plan ahead so that they are not caught unawares by potentially large future levy increases”.
LCP specialists say that there are several things that firms can do if they think this could apply to them. This includes:
- Make sure that the new method of measuring insolvency risk (introduced this April) accurately captures the company’s true financial position
- Review whether giving the pension scheme some extra security – for example through parent company guarantees – would help to reduce the risk to the PPF and thereby scale back any levy increase
- Consider whether other more technical mitigation actions might help, such as confirming to the regulator that deficit contributions have been paid, and that pension investment risk is being measured and managed appropriately.