Introduction to the levy

Eligible pension schemes have to pay the levy. This helps to make sure their members are protected if the sponsoring employer becomes insolvent.

Almost all ‘defined benefit’ occupational pension schemes, and schemes that have defined benefit elements are eligible.

Read more about which schemes are eligible.

What are defined benefit schemes?

Generally, your scheme is a defined benefit scheme if it has promised to provide a certain amount of pension for its members at retirement, based on how many years you’ve worked for your employer and the salary you’ve earned.

The scheme based and risk based levy

There are two parts to how the levy is calculated:

  1. The scheme based levy – is based on how large the scheme is and is payable by all schemes.
  2. The risk-based levy – takes account of the employer’s insolvency risk, the scheme’s underfunding risk and its investment risk.

Similar to an insurance premium the amount each scheme pays is based on the risk it could present. To calculate this, we assess the risk of your scheme being unable to meet its pension obligations and the sponsoring employer’s risk of insolvency.

How we calculate insolvency risk

Our insolvency risk partners assess the likelihood of the scheme’s sponsoring employer becoming insolvent at the end of each month. We then take an average over the year and place the scheme in the appropriate levy band.

Each band has a different levy rate, band 1 is the strongest band – with the lowest levy rate – and band 10 is the weakest.  

How we calculate underfunding risk

We take into account how well the scheme is funded by looking at the value of its assets and liabilities.

We use the information schemes give to The Pensions Regulator to work out whether the scheme could secure benefits for its members equal to, or better than, the benefits we could provide if the scheme employer became insolvent.

How we calculate investment risk

We also look at the risk associated with the assets the scheme invests in.

A scheme which is very well funded with a low-risk investment strategy and a strong sponsoring employer will pay a lower levy. If it’s sufficiently well-funded it could pay no risk-based levy at all.
 
Schemes that pose a higher risk of transferring to us will pay a higher levy, but the amount of risk-based levy each scheme has to pay is capped at less than half a per cent of its liabilities.

Ways to reduce the levy

There are ways for schemes or sponsoring employers to reduce levy bills:

  1. Make deficit-reducing payments and make sure they are certified on The Pensions Regulator’s Exchange website
  2. Pledge contingent assets, providing they meet certain conditions and are certified correctly each year

 

 

 

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