A Zero Levy Future? What the PPF’s Latest Announcement Means for Schemes and Surpluses

This blog was written by Kate Burgess and Crispin Freeman

Reduced levy:

The Pension Protection Fund (PPF) has announced a significant reduction in its levy estimate for the 2025/26 financial year, setting it at £45 million—less than half of the £100 million originally proposed. This marks the lowest levy ever charged by the PPF and represents a major shift in its funding strategy. With 99.7% of schemes expected to benefit, the average levy as a proportion of liabilities will fall from 0.011% to 0.006%, easing financial pressure on schemes and employers alike.

This dramatic cut reflects legislative changes to be introduced by the Pension Schemes Bill, which will grant the PPF greater flexibility in setting the levy. The Bill includes provisions that could allow the PPF Board to eliminate the conventional levy altogether, opening the door to a future where the PPF operates without requiring a levy from schemes—a radical departure from its original funding model.

Following this, the PPF has confirmed that invoicing for the 2025/26 levy will be delayed until the legislative process concludes, ensuring alignment with the new provisions. It continues to work constructively with policymakers and stakeholders to support these reforms, which aim to balance the interests of levy payers and scheme members while maintaining the PPF’s role as insurer of last resort for 8.8 million DB scheme members.

This legislative change follows a consultation process that closed in October 2024. During the consultation, stakeholders expressed concern about the continued imposition of a £100 million levy despite the PPF’s strong financial position. While modest relative to liabilities, the levy remained burdensome in absolute terms for some schemes. Respondents also highlighted the growing number of buyouts removing schemes from the PPF universe, further reducing the need for a substantial levy.

The ever-increasing surplus:

The rationale behind this reduction is clear: the PPF is in a robust financial position and the risks to it are reducing. 

The number of schemes which may require its support continues to decline, and the overall financial health of defined benefit (DB) schemes has improved significantly. Around 5,000 occupational DB schemes remain, with a collective surplus of approximately £221 billion on the PPF funding basis. This surplus has been driven by a combination of rising interest rates, which reduce the present value of scheme liabilities, and strong investment performance across both scheme and PPF portfolios. In addition, the increasing number of schemes securing buy-out deals with insurers has further reduced the PPF’s exposure to future claims. The PPF’s own surplus stands at £13.2 billion and its investment strategy has delivered consistent returns, further bolstering its financial resilience.

The PPF’s strong financial position has sparked ongoing debate about how its growing surplus should be used. Among the leading proposals is the return of surplus funds to sponsoring employers (although how this would work in practice has been questioned). The industry consensus suggests that, provided member interests and long-term scheme stability are safeguarded, this could unlock capital and ultimately boost growth across the UK economy.

Closely aligned with this economic ambition is the idea of using the surplus to establish a public sector consolidator. Such a vehicle would allow schemes to transfer assets and liabilities, freeing up capital for investment into the UK economy. 

Another compelling option is to enhance member benefits. While surplus distributions may not always mirror the benefits to which members may once have been entitled under individual scheme rules, they nonetheless would represent a welcome return for members. This approach has sparked recent industry noise — particularly in relation to pre-1997 benefits, which receive no increases under the PPF’s compensation framework. This issue has gained traction in recent industry discussions and is explored in more detail below.

For further insights into the future of the PPF’s surplus, see: The £13bn Question: What will happen to the PPF’s surplus? - Burges Salmon

Pre-97 increases:

With the levy shrinking and the PPF’s surplus growing, attention is turning to how these funds might be used. One option gaining traction is the enhancement of pre-1997 benefits, which are not currently subject to statutory indexation. Using surplus funds to increase these benefits would provide meaningful improvements for affected members and address a long-standing inequity in the PPF’s compensation structure.

This approach also aligns with the government’s broader ambition to unlock pension assets for UK investment, as highlighted in the recent Mansion House reforms. By deploying surplus funds in a way that benefits both members and the wider economy, the PPF could play a pivotal role in shaping the future of UK pensions and helping to support the wider economy.

The position as it stands:

In summary, the recent Pensions Scheme Bill marks a turning point in the funding strategy of the PPF. The reduction in the levy reflects the PPF’s strong financial position and the declining need for scheme support. At the same time, its growing surplus presents an opportunity to enhance member benefits and contribute to broader economic goals. As the PPF continues to evolve, schemes and advisers will need to stay informed and engaged to make the most of these changes.