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U.K. hikes employer pension levy

Move made to shore up resources of backstop for defined benefit plans

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LONDON—Britain's pension safety-net agency will boost the levy imposed on companies with defined benefit pension plans over the next year as it tries to make up for a revenue shortfall of £251 million ($501.4 million) last year.

How the Pension Protection Fund's new levy calculations, published last week, affect individual companies will depend on their pension assets, liabilities and risk of company insolvency, all of which factor into their PPF levy.

The PPF has made clear that it hopes to avoid a repeat of its 2006-2007 fiscal year, in which it collected less than three-fifths of its target of £575 million ($1.15 billion) because of poor data, along with miscalculations about the market and company behavior.

"We have to make up for undercollections," a PPF spokesman said of the fund's 2007-2008 target of £675 million ($1.35 billion) in revenue.

Created by a 2004 law, the fund provides pension benefits to the members of defined benefit plans that have gone insolvent since April 2005. To finance the fund, the government assesses levies on existing plans based on their liabilities, their underfunding risk and their risk of insolvency.

Companies can avoid the levy if they have funded more than 125% of their liabilities, and an employer can pay no more than 1.25% of their pension liabilities. Five percent of companies are capped at 1.25%.

One-fifth of the levy is a 0.0195% tax on an employer's total liabilities under the pensions law. The remainder is a risk-based levy, taking into account the company's total underfunding and its risk of insolvency based on the assessment of the market analysis firm Dun & Bradstreet. The formula gives companies an incentive to completely fund their defined benefit pension plans by reducing the taxes on them if they do.

The PPF spokesman said the levy revenue equals about 0.09% of the total assets of the pension plans that pay into the government fund. The agency could not, however, provide estimates on how much the average company will pay in 2007-2008.

An industry consultant said the 2007-2008 adjustments are likely to help the Pension Protection Fund's outlook.

"I think the chance of them undershooting is a lot less," said Stephen Yeo, senior consultant in the London office of Arlington, Va.-based Watson Wyatt Worldwide.

But he added that the levy increases are likely to be burdensome for many companies and could cause some to go under.

While the increases will vary because of differing liability and risk levels of different companies, they could end up costing certain companies as much as five times more in 2007-2008, Mr. Yeo said. He noted that likely candidates for such an increase are those rated by Dun & Bradstreet as having a high risk of failure of its pension fund or business operations, as well as having moderate-to-high underfunding pensions and having made no moves to improve the balance of liabilities and assets.

Manufacturing companies, particularly ones that have reduced operations in recent years, are likely to fit that profile, he said.

The PPF spokesman said, though, that the cap of 1.25% of defined benefit liabilities has been put in place to protect such weak companies.

"If a company is saying that it can't afford to pay the levy, I think there are more fundamental problems with the company," he said. "The levy is there to make sure that the less risk you pose to the system, the less you pay. The companies that are at the most risk of insolvency are the companies coming under our cap."

Correcting some of the errors of the 2006-2007 cycle is still an issue the agency faces, the spokesman said. The risk-based assessment is the world's first, and the data necessary to levy an accurate tax is probably a year away, he said.