Levy and let die? The future of the PPF’s risk-based levy

Since its introduction in 2005, the Pension Protection Fund’s risk-based levy (PPF levy) has been a burden for defined benefit pension schemes – a bit like a low-rate Bond villain (who doesn’t love a tenuous theme in a pensions blog?), striking from the shadows each year. But sponsoring employers will take a ‘quantum of solace’ from knowing that there may now be ‘a view to a kill’ when it comes to the PPF Levy. 

With the Pension Schemes Bill shaking up the industry, the PPF finds itself amidst the disruption, with changes afoot to both the PPF levy and the PPF administration levy. The PPF levy was put on hold for schemes earlier this year, and September saw the PPF announce that it would be reduced to zero for 2025/2026. 

Pensions are forever…

The PPF was created to act as a safety net for members of DB schemes who would otherwise lose out as a result of employer insolvency. The PPF compensates members for lost pensions up to certain limits.

There are two elements to the PPF levy: 

1. Most of the levy is risk-based and relates to the likelihood of a scheme failing.
2. The remainder is based on the size of the scheme and its liabilities. 

From employers with love…

Roughly 5,000 employers pay the PPF levy each year. The PPF currently has a £14.1 billion surplus and collected £104 million from employers last year. 

Reform anticipated under the Pension Schemes Bill will allow the PPF increased flexibility in determining the levy – and indeed, the PPF is already exercising it. In September, the PPF announced that no levy would be charged for 2025-2026 – a decision which saves sponsoring employers £45 million.

However, unlike the administration levy, which is set to be abolished in its entirety, the PPF levy is being reduced to zero with the possibility of being increased again in future at the PPF’s discretion. 

Tomorrow levy dies?

The PPF is in a strong financial position. With the number of DB schemes decreasing and de-risking activity booming, the risks once faced by the PPF are diminishing.

It seems unlikely that there will be a total abolition of the PPF levy in the near future, but given the abundance of surplus, the levy may be reduced to zero for some time to come. 

Questions are now being asked about how the PPF’s substantial surplus should be used. Industry commentators have argued both for:

• returning the surplus to levy-paying employers; although this would likely prove to be a complicated and time-consuming process; and
• using the surplus to enhance pre-April 1997 pensions for PPF members, a solution which has been strongly supported by trade unions (although this would require significant legislative changes).

You only levy twice?

Even with the PPF levy being reduced to zero and the administration levy being expected to ‘die another day’, schemes are still required to pay:

• a general levy (collected by The Pensions Regulator (TPR), which pays for the running of TPR, the Pensions Ombudsman and the pensions function of the Money and Pensions Service), which can cost anywhere up to £1m per year, depending on the scheme; and
• the Fraud Compensation Levy, collected by TPR and which is charged annually on a per-member basis.  

We’re not aware of any plans to abolish these levies, and indeed a decision was made last April to increase the general levy rate by 6.5% for a three-year period, with a view to eliminating a significant deficit by 2030/31. 

Here to help 

If you have any questions about how the incoming changes in the Pension Schemes Bill may impact your scheme, please get in touch with a member of our pensions team. 

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