A pull-back in the use of contingent assets by corporate sponsors has seen the levy imposed by the United Kingdom’s lifeboat for bankrupt company pension funds, the Pension Protection Fund (PPF), rise by almost 15% for the next financial year.
The estimate set by the organisation has risen to £630 million for the financial year 2013/2014, from the £550 million originally budgeted earlier in the year, the PPF announced today.
The levy is imposed on all corporate defined benefit funds in the United Kingdom, the proceedings of which are pooled and managed by the investment team. This fund will cover the cost of providing a pension to members of plans whose sponsoring employers collapse and are substantially underfunded.
One of the major reasons for the increase cited by the PPF’s CEO Alan Rubenstein was a reduction in the use of contingent assets – which had reached record levels last year.
Use of these assets – which can take the form of company property, physical assets, or written guarantees – serve to reduce risk and thereby push down the levy imposed on employers.
Last year aiCIO reported that UK employers were using a record level of contingent assets to reduce risk in their pension funds and plug shortfalls.
A consultation document released with today’s PPF announcement said: “In addition to the impact of market movements, it now appears likely that the level of risk reduction provided by contingent assets will be lower than had been anticipated, as many have been withdrawn and new certifications have been at a lower rate than in previous years for 2012/13.”
However, the document asks for feedback from pension funds and their employers on what can be used as a contingent asset and how they would be used for levy purposes.
Milan Makhecha, principal consultant at Aon Hewitt, said: “The stricter guidance issued last year by the PPF for Type A contingent assets (group company guarantees) seems to have acted as a deterrent – it appears that a notable number of schemes have certified a reduced obligation or not recertified their contingent asset at all, if there was any doubt as to whether the guarantor could meet its full obligation under the guarantee. As a result, the PPF expect to collect more in levies this year than they originally anticipated.”
One aspect welcomed by the industry was the announcement that the levy would not increase to more than where it sits this year.
Joanne Segars, CEO of the National Association of Pension Funds, said: “The PPF’s decision to keep a lid on the increase in the levy is realistic. It strikes a balance between protecting schemes from major extra costs and ensuring the PPF’s finances are strong and sustainable. It also recognises that schemes are facing extra pressures as a result of low gilt yields and quantitative easing.”
However, Rubenstein warned that levy increases in future were inevitable if the current high risk conditions persisted. He said: “People should bear in mind that, if our protection regime in the UK is to be credible, then it needs to be funded. The alternative, an inadequately resourced PPF, would fail to offer the security that pension scheme members deserve, and would strengthen the hand of those who argue for more radical measures to deal with risk such as the imposition of insurance style solvency requirements for pension schemes.”