No doubt pension funds and their employers will breathe a collective sigh of relief to hear that next year’s risk based PPF levy is not due to increase even if the PPF must provide extra compensation for long serving pension scheme members. These are scheme members who have more than 20 years of pensionable service in a pension scheme that is accepted by the PPF.
Responding to a Freedom of Information Request from Irwin Mitchell, the PPF said it’s not anticipating having to increase the PPF levy next year (2016/17). This is so even if pension legislation, put on the statute books by the former Pensions Minister, Steve Webb, comes into force, when currently still expected in April 2016. Although the secondary legislation to implement this change has yet to be passed to bring in this extra compensation, the PPF says it’s ready to introduce the change when it happens. Perhaps this is not that surprising, as at the end of the PPF’s financial year for 2014/15, it collected levies of £5.3bn, transfers in of scheme assets of £8.6bn, recovered £1.9bn from insolvent employers and achieved investment returns of £6.7bn after paying its operating costs and compensation payments.
The PPF’s most recent actuarial valuation indicates reserves which comfortably exceed the estimated cost of introducing the long service compensation cap. It monitors its projected funding position so it’s aware if its actual experience shows the position may deteriorate. The PPF also notes, while the levy is one of the factors it considers, it is not the PPF’s only source of income. Other money comes from recoveries of money and other assets from insolvent employers of schemes the PPF accepts; the assets of the schemes the PPF accepts and returns on the PPF’s investments. These sources of money will be used to meet the cost of the increased compensation for long serving employees when this change is introduced.
This is in line with the DWP’s assessment of the cost of this policy change, prepared for the Pensions Act 2014 where an immediate expected increase in the PPF balance sheet liability of £70m was quoted. The PPF’s own more recent estimate, for its 2014/2015 accounts, is £40m. The PPF notes, despite some uncertainties about the actual cost, these figures should be viewed in the context of the PPF having funding reserves of £3,629.1m (shown in its latest accounts). The PPF aims to be fully self-sufficient by 2030. It uses its financial model to calculate its probability of success for this and that model includes an allowance for this extra compensation.
Given some of Steve Webb’s legacy has already begun to be delayed, if not dismantled, like collective DC schemes, defined ambition and pot follows members, there must be some doubt about whether the changes to the PPF compensation cap will become law. However, increasing the level of compensation paid for long serving scheme members probably stands a higher chance of being implemented than some of the other changes. This is because the long service changes are perhaps being made partly with one eye to the Irish Waterford case. In this, the ECJ decided in 2013 that the Irish equivalent to our PPF was in serious breach of its responsibilities as its pension compensation scheme only paid 50% of benefits and as such did not accurately reflect the requirements of EU law. The Waterford case was eventually settled by the Irish Government offering extra compensation of 180m euros to members of the Waterford schemes.
The PPF pays compensation to members of eligible occupational pension schemes where the employer becomes insolvent and the scheme is left under-funded. Members under the scheme’s normal pension age on the insolvency receive compensation based on 90% of their expected scheme pension subject to the compensation cap. The standard compensation cap still applies for people with 20 or less years of pensionable service in the relevant scheme. The new cap for long serving members increases by 3% of the standard amount for each full year over 20 years of pensionable service to a maximum of double the standard amount so the member must have 21 years of pensionable service to benefit from this change. Various transitional provisions apply. Wherever the cut off for this extra compensation is set, it has the disadvantage of creating a new cliff edge for members and all the difficulties which can arise from this. This may be why there is still no set date for the implementation of this change!