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AIA

Firms to pay risk based pensions levy from 2006/7

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12th Jul 2005
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Companies with under-funded pension schemes or a high risk of insolvency will have to contribute more to the Pension Protection Fund (PPF) from 2006/7.

The PPF, which was launched in April 2005, compensates workers who lose their pension because their company goes bust. It is funded by an annual levy on companies with final salary pension schemes. The Pensions Act 2004 states that at least 80% of this levy should be 'risk based'. This week the PPF announced initial details of how the levy will work.

The risk based levy will be introduced as early as possible in the financial year 2006/7, and will be based on insolvency risk and scheme under-funding. However, the levy will be capped at a fixed percentage of liabilities to protect weaker schemes.

Insolvency risk will be measured by a credit agency. Level of scheme funding will be measured by looking at the difference between the value of a pension scheme's assets and its PPF liabilities. The PPF board has proposed a legislative change that will require all eligible schemes to provide s179 valuations by 31 December 2006.

Modelling work will take place over the next few months to determine the levy estimate for 2006/07, which the PPF board aims to publish by 30 November 2005, together with results of a consultation exercise. A further four weeks' consultation will follow the publication date.

PPF board chairman, Lawrence Churchill, said: 'The Pension Protection Fund is keen to build on the broad industry support for the introduction of the risk based levy, and is committed to working in partnership with the industry to develop and introduce a transparent and objective method for calculating a credible and robust risk based levy which is both fair and proportionate.'

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