An actuarial consultancy warns companies could end up having to fork out £1.5bn to support the Pension Protection Fund (PPF), more than five times more than government's original estimates.
The figure from Hymans Robertson is based on calculations from a 90-page consultation document put out by the PPF last month proposing a levy structure for 2006/2007 and moving forward.
The document details the risk-based element of the levy, with consideration given to the scheme size, the amount of deficit and the financial strength of the employer. However, Hymans Robertson believes significant details have been excluded from the document taking the original £300m government estimate of money needed from occupational pension schemes to feed the Pension Protection Fund.
Senior Consultant at Hymans Robertson, Martin Potter says the information provided by the PPF document alone provides fuel for a revised estimate for the total levy in excess of £1.5bn, while depending how companies are distributed across the 10 proposed bands for insolvency risk, the estimate could even reach £2bn.
He continues: “The PPF are not being greedy, this is how the theory tells them they should be pricing the high level of protection that the PPF offers. I think the government will find that now they have got to the check-out there is a rather expensive item lurking in the bottom of their shopping basket.”
Potter points out several ‘get clauses’ as tools to water things down, including scaling factor, which could be used if the total risk exposure across all schemes exceeds ‘the total amount the Board considers it should raise’.
The firm says the consultation makes no proposal as to what the scaling factor should be, which might be used to cut the £1.5bn to a more palatable increase on the original £300m estimate.
Charles Young, partner at Hymans Robertson , says the PPF Board mentioned additional ‘modelling’ over the summer to determine their levy estimate for 2006/2007.
He adds: “They say it is likely to be 'somewhat higher' than the original £300m figure. Given the amount of work they have clearly already done it is hard to understand why they have not indicated what the figure might be.”
The PPF says the consultation document does not include an estimate of how much money it expects to collect from the levy in 2006/7, adding it will perform modelling during the summer to come up with a levy estimate, while taking into account changes in the key assumptions since the government's initial £300m estimate in December 2003.
It argues, given the lower interest rates and an assumption of greater longevity, it is likely that the its own estimate will increase.
Head of Communications at the PPF, Paul Reynolds says: “Estimating the pension protection levy based on current data is hard and any answer will be sensitive to the assumptions contained on the model.”
He says the Pensions Regulator is collecting data from over 8000 defined benefit pension schemes over the summer, which will enable the PPF to estimate the levy for 2006/07 taking into account information on corporate structure and scheme structure.
Reynolds adds: “The PPF’s estimate of the total required levy across all schemes will take into account the effect of recoveries, investment returns and the effect of scheme structures (e.g. multi-employer risk where available), in addition to economic and demographic factors.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Gareth Vorster on 020 7968 4554 or email [email protected].IFAonline
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