Consultation Paper on the Future of the PPF Levy

Stakeholders have emphasised the desire for stability in the levy estimate and their individual bills, as well as the importance of knowing the amount of their individual bills in advance of the start of the levy year.

In response to this the Board is proposing to maintain a stable levy estimate (allowing for indexation) for the next three years, subject to there being no significant change in long-term risk exposure.

While volatility of individual bills is innate to a risk based approach, the Board is proposing a number of actions that should lead to a reduction in the volatility of individual bills in the short term, including:

• Setting a stable levy estimate for the next three levy years;
• Collecting an amount each year that is closer to the levy estimate, and
• Changing the levy distribution parameters to manage the level of cross-subsidy between stronger schemes and weaker schemes.

The Board is keen to share principles and ideas concerning the evolution of the levy, improving the fit between the way the total levy estimate is distributed between all eligible schemes and the theoretical levy produced by the Long Term Risk Model. Such a move should lead to:

• Greater alignment between the levy estimate and levy distribution formula;
• Fairer allocation of levy costs to stronger and weaker credit quality schemes and those with higher or lower asset volatilities relative to liabilities;
• Reduced volatility of individual levies year on year, and
• A more stable scaling factor.

In addition to evolving the levy distribution formula to take into account longer term measures of underfunding and insolvency and to allocate catastrophe risk, a further refinement could be made to the way the scaling factor is calculated, with separate scaling factors calculated for different categories of scheme reflecting their different contributions to the levy estimate and long-term risk, particularly catastrophe risk.

Again, any developments in the medium term are designed to create stability for levy payers, while remaining true to the principles of fairness, proportionality and simplicity outlined above.