Thousands of employers could see “substantial” rises in levies paid to the Pension Protection Fund as Covid-19 prompts a wave of business failures, the UK industry lifeboat scheme has warned.
Roughly 5,500 corporate pension schemes pay annual levies to the PPF, which pays compensation to members of “defined benefit” plans where the sponsoring employer has been declared insolvent.
The PPF has signalled a “substantial” rise in levies in 2022/23 after its analysis suggested that corporate insolvencies in 2020/21 might be twice the level of 2019.
“Although current insolvency rates remain low, our view is that this reflects the impact of government support schemes,” said the PPF in a consultation document published on Tuesday.
“As these come to an end we expect an increase in the level of insolvencies and a significant increase in claims on the PPF.”
The PPF said it only expected Covid-19 to have a “limited impact” on levy bills for 2021/22 due to the timeframe in which insolvency risk scores were calculated for individual businesses, but the “main effect” of the pandemic would be seen in 2022/23 invoices.
“At that point, however, the effects could be substantial — with many employers seeing a worsening in their levy score,” said the PPF.
“All else being equal, this would lead to a rise in levy bills.”
PPF analysis suggested there would be more failures among substantial-sized businesses, with equally large pension deficits, which could lead to claims significantly larger than it had previously seen.
The dire prediction for business failures came as the PPF unveiled proposals to help ease levy costs in 2021/22 for employers struggling with the impact of Covid-19.
This included plans to reduce the total levy collected by £100m to £520m, which the lifeboat said was possible due to its strong funding position prior to the pandemic.
The PPF also proposed to halve levies for small schemes with less than £20m in liabilities.
“The current environment makes setting an appropriate level for the levy particularly challenging,” said David Taylor, executive director and general counsel at the PPF.
“But for now, we believe the changes we’re proposing for 2021/22 will provide valuable support to the schemes and employers.”
Steve Webb, partner with LCP, an actuarial consulting firm, said there was no doubt that sponsoring employers would welcome the proposed reduction in the overall levy for 2021/22.
“Sadly, this is likely to be only a temporary respite,” said Sir Steve.
“The impact of the current crisis on insolvencies has yet to be fully seen, not least because of temporary government support measures. As these unwind, we are likely to see more insolvencies and more claims on the PPF, especially in 2022/23 and beyond.”