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Alternative Risk-Based Levies in the Pension Protection Fund for Multi-Employee Schemes

XFi Working Paper No. 08/01

42 Pages Posted: 31 Oct 2008  

Ian Tonks

University of Bath School of Management

Weixi Liu

University of Exeter Business School - XFI Centre for Finance and Investment

Date Written: June 15, 2008

Abstract

This paper examines the basis of the annual levies paid to the UK's Pension Protection Fund by the Universities Superannuation Scheme, a multi-employer scheme covering approximately 380 universities and related institutions. The paper compares the payments between the two alternative participating arrangements for multi-employer pension schemes to the PPF, namely Last-Man-Standing and Segmented levies. Using an Ohlson (1980) logit model to predict the insolvency risk for higher education institutions, we find that financially distressed institutions are smaller, with higher leverage and lower earnings. By comparing the implied insolvency probabilities from the PPF risk-based levy using USS accounts with the simulated probabilities using our logit model, we estimate whether USS levies are fairly priced. Our estimates suggest that in 2006/07 USS member institutions appeared to be paying less than the fair risk-based levy. However this is because during the initial phase of the PPF the risk based levies were much lower as a proportion of the total levy than the intended steady-state values. The implication is that if USS had paid the same total levy but where the risk-based component was four fifths of the total, then USS would have been paying substantially more than its fair risk based levy. In addition by looking at the distributions of individual university risk-based levies under a segmented PPF arrangement, we find evidence of significant cross-subsidies under the current last-man-standing levy between participating USS institutions.

Keywords: Pension Protection Fund, Universities Superannuation Scheme

JEL Classification: G23

Suggested Citation

Tonks, Ian and Liu, Weixi, Alternative Risk-Based Levies in the Pension Protection Fund for Multi-Employee Schemes (June 15, 2008). XFi Working Paper No. 08/01. Available at SSRN: https://ssrn.com/abstract=1274122 or http://dx.doi.org/10.2139/ssrn.1274122

Ian Tonks (Contact Author)

University of Bath School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Weixi Liu

University of Exeter Business School - XFI Centre for Finance and Investment ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

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