The Pension Protection Fund (PPF) has launched a consultation on 2023/24 levy rules, revealing that the levy estimate has been nearly halved to £200m for 2023/24, with the lifeboat also working with government to explore future legislative changes.

The 2023/24 estimate marks a "significant" £190m reduction on the £390m levy collected in 2022/23, with the PPF encouraging schemes to use any savings from the reduced levy to "further strengthen" their position.

In its consultation, the PPF explained that while some of the reduction reflects a fall in scheme risk, the lifeboat is also taking active steps to reduce levies and to change the distribution of the levy in line with its long-term vision.

In particular, the PPF will be reducing the sensitivity of the levy to changes in insolvency risk by halving the incremental increase between levy bands.

This is expected to reduce the volatility of bills, in what was highlighted by the lifeboat as “a first step to enabling a simpler approach to insolvency risk in the levy”.

In addition to this, the PPF will cut the Levy Scaling Factor by 23 per cent and Scheme-based Levy Multiplier by 10 per cent, with all PPF levy payers expected to see a reduction in their levy next year as a result.

To support further reductions in levy in future years, the PPF also confirmed that it is working with the Department for Work and Pensions (DWP) to explore legislative change, so that it has the ability, in the unlikely event it is needed, to raise the levy again more freely.

“There is a need for change (and a real opportunity), but legislation gives us some limitations,” the PPF stated, arguing that the new levy should be flexible and that the methodology should be simpler and easier for schemes to engage with.

Whilst the lifeboat clarified that development of the levy will take time, it has already identified four key design principles to inform the evolution of its levy methodology: increased flexibility in the amount of levy collected; increased flexibility to charge on the basis of the size of the scheme; rebalancing the risk-based levy; and being open to using different approaches depending on scheme size.

The consultation was launched following the PPF’s Long-term Funding Strategy review, which revealed that its funding position has “significantly strengthened” in recent years, driven by strong investment performance and a reduction in risk posed to the fund.

As a result, the PPF is making a “step change” in its approach and entering a new phase shifting focus from building to maintaining its financial resilience.

The PPF has also outlined new funding priorities and revised funding objective which will be assessed through a new ‘Financial Resilience’ test, which will require PPF’s reserves to provide a high level of confidence on the security of members’ benefits without relying on levy.

Once funded above this level, any further growth in reserves would be expected to come primarily from investment returns, although the PPF clarified that its board will continue to consider the role of levy against any changes in the wider economic backdrop.

PPF chief executive, Oliver Morley, stated: “We’ve made rapid progress on our funding journey in recent years and are further ahead at this point than we expected to be, largely through the excellent performance of our investment approach.

“We are close to achieving our Financial Resilience target, meaning we can now start to actively take steps to bring down the levy without risking current and future members’ benefits.

“This allows us to share the positive impact of our strengthened position with the 5200 schemes, and ten million members, protected by us.

“This prospect of a materially lower levy collection in the future also presents us with a rare opportunity to simplify how the levy is calculated.

“We believe a simpler levy would bring benefits for all stakeholders. We have consulted with industry experts as we continue to shape our proposals and are grateful for their contribution.

“We now hope that many more stakeholders will respond to our consultation and help us shape our future levy rules.”

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