UK Pension Insurer Releases 2006-2007 Levy Details

December 16, 2005 ( - UK authorities have announced that employers operating defined benefit plans would pay a total of £575 million ($1.01 billion) to finance the pension rescue fund in the 2006/07 year.

That figure,  released Friday by the United Kingdom’s Pension Protection Fund (PPF) includes a risk-based element of the levy that will be charged to certain employers, according to Business Insurance.

The PPF announced that the annual risk-based levy would be capped at 0.5% of the total value of liabilities a fund would face if accepted into the PPF. This, the PPF said, would allow weaker plans to better afford the levy. Levies for employers that operate defined benefit pension plans that are funded at 125% or more of their PPF liabilities would be based solely on flat rates, according to the PPF’s new proposals.

The PPF, loosely modeled on the US Pension Benefit Guaranty Corp., was set up to meet the unfunded obligations of insolvent employers with underfunded defined benefit pension plans.

Currently, employers operating UK defined benefit pension plans are required to pay a flat-rate levy to the PPF. Starting in April 2006, only 20% of most employers’ bills would be based on the flat-rate levy and 80% would be based on the risk-based levy. That charge would take into account the level of underfunding of an employer’s plan, the risk of insolvency of the sponsoring employer and the amount of benefits the fund would have to pay out if accepted into the PPF.

In the final proposals, the PPF said it would consider the use of contingent assets such as letters of credit used by employers to address funding deficits. Employer representatives such as the London-based Confederation of British Industry had lobbied the PPF to take account of such assets when calculating the risk-based levy.

The PPF guarantees 100% of benefits to members already in receipt of a pension and 90% of benefits owed to members still working, up to an annual limit of £25,000 ($43,878).

In addition, the PPF has updated its proposals for employers to be assigned to various risk bands based on their insolvency risk. The PPF said Friday it would introduce 100 such bands, rather than the previously expected 10. This, it said, would increase precision in assigning the risk bands.