The Treasurer January-February 2007
A pain that won’t go away
It is always a gloomy moment when you realise that those unavoidable bills are soaring. Even financially comfortable treasurers feel the personal pain of above-inflation rises in council tax and utility bills, so we can all understand why business leaders are alarmed about the promised bills that will be landing on the corporate doormat from the Pension Protection Fund (PPF). The bad news is that the levy estimate for 2007/08 will be set at £675m as opposed to last year’s levy of £575m – although in the end the PPF only collected £324m as companies took steps to improve their insolvency risk scores, and the improvements in equity markets helped produce lower than expected deficits. The 2007/08 levy is made up of a £135m scheme-based levy and a £540m risk-based levy. The PPF – which has to be applauded for the transparent and upfront way it delivered the news – says that this increase is necessary to:
- Help reduce the PPF’s current deficit, including making up for undercollection of the levy during 2006/07;
- More accurately reflect the PPF’s exposure to long-term risk;and
- Ensure public confidence in the PPF’s financial security.
They are all good reasons but business leaders have reacted with understandable dismay to the hike in the levy. The CBI pointed out that companies have been making historically high contributions to company pension schemes, that the cost of the PPF is a real concern to business, and that the volatility of the levy makes it difficult for companies to plan ahead. The bad news for the CBI is that, according to pension experts, the pain may not stop here. Experts agree with the PPF that higher levies are needed but there are still fears that the new target is short of the true figure required to secure members’ benefits in the longer term.
The big concern is that the PPF is relying on today’s relatively benign economic conditions continuing in order to meet its obligations. The PPF shortfall comes at a time when there are few corporate collapses. If an economic downturn does start to bite, it seems inevitable that the levy will soar to levels that will really upset the CBI. The PPF has promised to make improvements to its fund and says that at the heart of its proposals is a desire to continue to provide incentives to pension schemes to reduce their own risks. If that is the case, then while the PPF performs its tricky balancing act between cost and security, treasurers must continue to ensure they take full advantage of the PPF’s incentives.
See A balancing act, page 20.