Pension levy £250m less than forecast

The Pension Protection Fund, the lifeboat scheme set up to protect millions of savers' pensions, is set to raise £250m less than it had hoped this year, it emerged yesterday. The PPF's annual report showed it is on target to take in £324m from a levy on the UK's final-salary pension schemes during the 2006-07 financial year, compared with its original target of £575m.

The shortfall has occurred because the levy is based on a fixed risk-based formula that charges the sponsoring employers of schemes according to the PPF's view of how likely they are to one day become a burden on the fund. After the levy was set, improving investment returns and efforts made by schemes themselves to improve their risk profiles resulted in many employers paying less than expected.

This year's shortfall will come on top of a £343m deficit at the scheme at the end of the 2005-06 annual year. However, Partha Dasgupta, chief executive of the PPF, said the scheme had always expected there to be funding shortfalls in the first few years of its operation. He rejected suggestions that the scheme would have to ask employers for much larger payments in future.

"That assumption would be wrong because in future we will benefit from investment returns and further recoveries from schemes in default," Mr Dasgupta said. "However, next year's levy is likely to be higher in order to reflect both short-term and long-term risk."

Stephen Yeo, a senior consultant at the actuarial adviser Watson Wyatt, warned that while the compensation scheme would be able to ride out shortfalls in revenue in periods when there were fewer corporate insolvencies, the PPF would be more vulnerable if the business environment worsened.

The PPF revealed yesterday that it has rescued the pensions of around 43,000 people since its launch in April 2005. In addition to the scheme's involvement in the high-profile failures of companies such as Rover, Allders and Turner & Newall, it has also agreed to underwrite 95 other pension plans.

The scheme is already providing income to 10,000 people.