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Thousands of UK employers are expected to see “significant” cuts to the insurance levy they pay to the corporate pension rescue scheme, as the body passed the threshold of becoming better funded than the plans it protects for the first time.
The Pension Protection Fund’s war chest grew to £12.1bn as of March this year, up from £11.7bn in the previous financial year, according to annual accounts published on Thursday.
The increase was largely driven by rising interest rates that have had the effect of reducing the calculated liabilities of the scheme. Any levy reduction will ease the burden on businesses, which typically pay the insurance on behalf of their retirement plans.
“For the first time in our history, our reported reserves now exceed the combined deficit of the schemes we protect,” said the report. “This represents a material change in the risk profile of the schemes we protect.”
While the PPF’s assets fell from £39bn to £32.5bn in the year to March 2023, this slump was offset by a deeper 25 per cent fall in estimated liabilities.
The lifeboat scheme’s position was bolstered by a corresponding improvement in the financial health of the 5,100 defined benefit (DB) schemes it protects, serving about 10mn members. DB schemes pay retirement income based on salary and length of service.
The PPF estimated that the combined deficit of those plans fell from £60bn to £6bn, according to the report.
Oliver Morley, chief executive of the PPF, said there were likely to be further cuts to the annual insurance levy next year. The PPF estimated it will collect about £200mn in levy this year, down from £390mn last year.
Private sector DB schemes are obliged to pay an annual levy to the PPF to cover compensation for pensioners if the company fails and can no longer back the scheme.
“We’ve [already] cut levy in half,” Morley told the Financial Times in an interview. “You’re not seeing anyone else cutting prices at the moment.”
He said the levy rate for the next year was still being finalised but he expected the reduction “will be again, significant”.
The publication of the annual report came as the government considers widening the role of the PPF to become a consolidator of healthy DB pension plans. This would potentially expand the pool of assets the PPF, a public corporation, could invest to boost UK growth.
“It’s important that with the wider policy debate on the PPF, that we are not changing our investment strategy, yet,” Morley said. “We still need to make sure that we are capable of meeting all claims under all circumstances.”
He would not be drawn on the options the government was considering but said: “We stand ready to serve, and see there’s a lot to be said for consolidation and scale.”
The fund’s rosier position comes as it continues to receive complaints from members not getting inflation-matched rises on their compensation, as the cost of living crisis continues to erode income.
Hundreds of thousands of pensioners who have benefits built after 1997 are limited to annual increases of 2.5 per cent. However, the oldest pensioner members, with pensions built before 1997, are not entitled to any increases in their benefits.
The government sets the rules on compensation for PPF members but the PPF board has some discretion over increases for post-1997 benefits.
Morley, who received a bonus of £50,000 to £55,000 over the year, according to the report, said that any changes based on inflation rises were “for government to make a decision on”.