The National Association of Pension Funds (NAPF) wants the compensation costs of failed pension schemes which fall under the government's Pension Protection Fund (PPF) to be spread fairly amongst the remaining schemes.
The introduction of a risk-based element of the pension protection levy mentioned in the PPF’s consultation paper, has been welcomed by the NAPF along with the majority of the proposals.
But it is concerned about how fairly it will spread the costs incurred from failed schemes that have never contributed to the PPF but which still come under its remit.
The organisation argues the costs of compensation should not be met by the risk-based element of the levy as such a move would not be consistent with the PPF’s stated principles of fairness and proportionality.
Christine Farnish, chief executive of NAPF, says: “We support the proposals for the introduction of a risk-based levy at the earliest opportunity, but there remain a number of concerns."It is evident that the cost of the PPF is going to exceed the government’s estimate of £300m a year by a substantial margin. It must ensure that the costs incurred should be spread fairly, over more than the first year, so that they are met entirely by the scheme-based element of the levy. "The alternative would mean that the burden on the weakest schemes could be unaffordable, representing not only a fair assessment of the risk they represent to the PPF but also a large proportion of the costs incurred by failed schemes which have never made any contribution."
Another concern about the risk-based element of the levy is that it will take no account of contingent assets in considering the strength of the scheme. Employers and trustees are being encouraged by the regulator to look in the future at new and innovative ways to secure pension promises with contingent assets being one important way of achieving this. The NAPF is worried that decisions made by the PPF might inhibit this kind of market innovation.
But John Lawson, marketing technical manager of Standard Life, there are problems with the introduction of a risk-based element to the levy. He says: “First of all the figure of 104% of the PPF level that helps to determine the risk levy for schemes may not be beneficial for everyone, as it means safer schemes will not necessarily be rewarded for being well-funded. There is also the fact that the risk levy will be based on the allocation of higher risk investments. This may drive trustees to make decisions based on the PPF level and may make them take the decision to move to safer assets in order to try and avoid a higher levy.”
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 Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
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