Thousands of UK pension schemes to benefit from levy cut

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Almost all of the UK’s 5,200 “final salary” style company pension plans will see a cut in compulsory payments to the industry lifeboat fund next year.

The Pension Protection Fund announced on Thursday that the levy it collects from eligible “defined benefit” schemes to help cover compensation payments to members of failed company retirement plans will halve in 2024/25 to £100mn — a record low.

The move comes as the financial position of the PPF has strengthened over recent years due to levy contributions and strong investment returns, with its reserves reaching £12bn this year.

“Next year’s target collection of £100mn will be the lowest levy we’ve ever charged,” said David Taylor, executive director and general counsel with the PPF. “As a result, almost all schemes will see a fall in their levy.”

The PPF consults annually to determine the level of the levy, which has been reduced in recent years.

The fund reported £32.5bn in assets in March this year and faces pressure from businesses to drop the levy payments because of its growing war chest. 

The PPF, which came into operation in 2005, is funded by the levy but also through the assets it takes on from pension schemes that have transferred to it after the failure of sponsoring businesses. In 2019 the fund reported reserves of £6.1bn, compared with £12.1bn in March this year.

The fund protects about 5,200 schemes with nearly 10mn members. It paid £1.2bn in compensation payments to some 193,218 retired members in 2022/23, with another 102,310 not yet eligible, typically due to age.

On Thursday the PPF said “almost all” respondents in its consultation “felt strongly” that legislation should be changed “as soon as possible” to allow the scheme to move to much lower levy, or cut it altogether.

“We’ve shared these responses with the Department of Work and Pensions who will consider the points raised and expect to legislate as soon as parliamentary time allows,” said Taylor. “The possibility of zero levy in future has come closer into sight.”

Many in the pensions industry say they should not be have to pay the levy while the PPF’s financial position is so strong.

“The PPF is requiring employers — who typically pick up the cost of levies — to hand over £100mn that it very much expects not to need, without a mechanism for paying the money back,” said Joanne Shepard, head of PPF consulting with WTW, which advises pension schemes.

“If levy payers’ contribution to the PPF’s war chest is money they are unlikely to see again, it adds insult to injury to continue charging meaningful amounts.”