The pension protection levy is one of the ways that the PPF funds the compensation payable to members of schemes that transfer to the Pension Protection Fund.
It is payable by all UK defined benefit (final salary) pension schemes whose members would be eligible for PPF compensation if the sponsoring employer(s) becomes insolvent and there are not enough assets remaining in the scheme to pay benefits at PPF levels of compensation. In some circumstances, though, some schemes may qualify for a levy waiver.
The pension protection levy is divided into two parts:
The scheme-based levy (SBL) is based on a scheme’s liabilities to members on a section 179 basis. This currently makes up approximately 20 per cent of the total we aim to collect.
The risk-based levy takes account the risk of a scheme’s sponsoring employer becoming insolvent (insolvency risk) and the amount of compensation that might then be payable by the PPF (underfunding risk).
It makes up 80 per cent of the total we aim to collect, though some schemes with very low levels of risk may not have to pay the risk-based levy. Schemes can reduce the risk with contingent assets and deficit reduction contributions.
The pension protection levy is charged annually; the levy year runs from 1 April to 31 March. Before the levy year begins, the Board of the Pension Protection Fund is required by law to consult if any of the levy factors or levy rates differs from the previous year’s levy.
Other levies
There are two other levies that relate to the PPF.
Administration Levy
The administration levy pays for the ongoing administrative costs of the Pension Protection Fund. Schemes pay an amount per scheme member, which varies according to the total size of the scheme.
The Department for Work and Pensions consults annually on the regulations providing for the amount payable, which is then set by statutory instrument.
The Pensions Regulator collects the administration levy on behalf of the Pension Protection Fund and it is invoiced separately to the pension protection levy. Any queries relating to the administration levy should be raised directly with the Regulator.
Recent publications about the administration levy:
Consultation on Draft Regulations: The Occupational Pension Schemes (Levies) (Amendment) Regulations 2008
The Occupational Pension Schemes (Levies) (Amendment) Regulations 2007
The Fraud Compensation Levy
The Pension Protection Fund can raise a fraud compensation levy to fund the Fraud Compensation Fund. More information about the Fraud Compensation Fund.