The amount companies pay into the Pension Protection Fund (PPF) could see a threefold rise as a result of the Covid-19 crisis, as firms face a ‘perfect storm’ for their own funding levels, Lane Clark and Peacock (LCP) has warned.

The firm explained that the PPF raises a levy on defined benefit (DB) pension schemes annually, with 2020/21 expected to see a total rise of £620m.

It highlighted that, while the coronavirus is likely to see an overall increase in the rise of the levy across all firm, some may face much bigger increases, particularly where their scheme
deficit has increased or their solvency position weakened.

LCP stated that there were three factors which could lead to large increases in PPF bills, with the worst-affected expected to see their annual levy payments to the PPF rise by “a million pounds or more”.

The firm highlighted that the overall funding position of the PPF is “likely to deteriorate” as higher-than-expected levels of corporate insolvencies lead to more claims on the lifeboat.

It also warned that funding for the lifeboat itself is “already likely to come under pressure” due to planned RPI reforms, echoing warnings from Redington earlier this month.

It attributed any potential funding pressure on a fall in asset values, an increase in the value of liabilities, and the suspension of pension contributions to ease employers’ cash flow during the crisis.

The firm highlighted that individual firms, and particularly those hardest hit by the crisis, could also be judged at a higher risk of going insolvent, with this also increasing the amount of ‘risk-based’ levy they have to pay to the PPF.

As such, the firm urged schemes to ensure that the new method of measuring insolvency risk, introduced in April 2020, accurately captured the company’s “true financial position”.

Employers were also encouraged to review whether giving the pension scheme some extra security, and to consider whether other more technical mitigation actions might help.

LCP partner, Alex Waite, explained: “The PPF is strong enough to withstand the present crisis, but it is likely to need to raise more in levies, with some firms facing particularly large increases.

“A rise in corporate insolvencies will put increased pressure on PPF levies across the board. But individual firms could see a much more dramatic change.

“If their pension scheme deficit has increased and if their own insolvency risk has also risen, this ‘perfect storm’ could eventually see million pound levy increases for some employers.

“It is vital that employers plan ahead so that they are not caught unawares by potentially large future levy increases.”

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