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PFF Levy – the time for reform is now

The Pension Protection Fund is a key part of the UK defined benefit (DB) system, stepping in to provide essential compensation for members if the employer funding their pension becomes insolvent. It’s a lifeline to people who may think they’ve lost their entire retirement income. 

The PPF is funded primarily by a compulsory levy on eligible DB schemes and, since it was established, schemes have been happy to put their hand in their pocket. 

But in recent years levy payers have raised concerns as the PPF continues to impose levies on UK DB pension schemes despite being in a position of significant surplus. The PPF currently has a £13 billion surplus equivalent to a 166% funding level. 

Even if the PPF were to suddenly face an increased number of claims, equal to the total amount in the past 5 years (£2.2 billion), reducing reserves to around £10 billion, it would easily be able to absorb these claims and continue to be very well funded.  

The argument for the 2025 / 2026 levy to be zero is strong but one of the key barriers is legislative. 

To mitigate the risk of levies being increased to unaffordable levels, two measures were included in the legislation which was drafted more than twenty years ago. 

The first was an absolute ‘ceiling’ on the amount that could be raised. The second, limits year-on-year increases to 25%. The issue with this is that a zero levy would mean no increase could ever be possible. 

The PPF Board were due to decide on the 2025 / 2026 levy in December but have deferred this decision to January recognising feedback from the industry.  

The hope is that DWP will look to reform the limits on the year-on-year increase and include it as part of upcoming Pension Schemes Bill affording the PPF greater flexibility and the ability to have a zero levy. 

Given its substantial surplus and the reduced risk to the PPF due to improved funding of DB schemes, it simply cannot be right for the PPF to continue to impose substantial levies on pension schemes and sponsors. This diverts resources that could otherwise be invested in the UK economy at a time when employers are facing increases to National Insurance contributions. The time for reform is now and the industry is watching.