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Insight

Not-for-profit schemes may pay millions more to pensions levy

I see that the National Association of Pension Funds warned last week that there will be a significant increase in the Pension Protection Fund levy paid by the not-for-profit sector as a whole. The I see that the National Association of Pension Funds warned last week that there will be a significant increase in the Pension Protection Fund levy paid by the not-for-profit sector as a whole. The NAPF was responding to a consultation by the PPF on changes to its methodology for assessing an employer's insolvency risk. The PPF, the statutory lifeboat for insolvent final salary pension schemes, wants to make the assessment more "PPF-specific". It is aiming for a more direct link between the risk a scheme poses to the PPF if its sponsor becomes insolvent and the calculation of the levy it must pay.

Unfortunately for the not-for-profit sector, the emphasis of the new methodology on financial data means that there will be a significant overall increase in the levy paid by the sector as a whole. There will be winners and losers. The PPF's own analysis estimates that of the 558 schemes which it classifies as not-for-profit, just under two-thirds will see a reduction in their levy and around one third will see an increase. But the aggregate increases will more than outweigh the reductions. For "outlier" schemes, the increases will be significant.

One of the welcome innovations of the new methodology is the creation of a specific not-for-profit scorecard. This is still under development, but one of the objectives is to create a better understanding and measurement of insolvency risk in the sector. It is recognised that this risk is generally lower than would be suggested by the focus on financial data under the standard insolvency model and the aim is to capture the specific factors that indicate this lower risk.

It is to be hoped that the not-for-profit scorecard will look beyond Companies House and the Charities Commission for financial data – for example, the Higher Education Funding Council, not the Charities Commission, regulates many educational charities. The PPF and its new insolvency adviser, Experian, needs to work with the not-for-profit sector to identify alternative sources of financial data and also the non-financial factors which are helpful indicators of insolvency risk in the sector so that the scorecard produces a fair assessment of risk.

In the meantime, employers in the sector are encouraged to take advantage of the opportunity to submit information to Experian to close the data gaps which appear to be one of the critical factors in leading to levy increases with the new methodology for employers that do not routinely file accounts at Companies House or with the Charities Commission. This lack of publicly available financial information means that the sector has more than its share of employers with insolvency scores based on sector averages rather than specific employer risk assessments.

The opportunity to submit information direct to Experian is a feature of the new methodology which may be particularly attractive to employers in multi-employer schemes for non-associated employers. These employers may be reluctant to share data with the scheme - and other employers with whom they may be in direct competition - but may be able to improve their insolvency score by supplying the information direct to Experian.

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