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Alternative risk-based levies in the pension protection fund for multi-employee schemes*

Published online by Cambridge University Press:  16 June 2009

WEIXI LIU  and
IAN TONKS
WEIXI LIU*
Affiliation:
Xfi Centre for Finance and Investment, University of Exeter Business School, Exeter
IAN TONKS*
Affiliation:
Xfi Centre for Finance and Investment, University of Exeter Business School, Exeter
*
(e-mail: [email protected])
(e-mail: [email protected])
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Abstract

This paper estimates the risks of financial distress in UK universities, and uses these estimates to examine the basis of the annual levies paid to the UK's Pension Protection Fund by the Universities Superannuation Scheme, a multi-employer scheme covering 391 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 financial distress risk for HE institutions, we find that financially distressed institutions are smaller, with higher leverage and lower earnings. By comparing the implied financial distress 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.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 8 , Issue 4 , October 2009 , pp. 451 - 483
Copyright
Copyright © 2009 Cambridge University Press

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Footnotes

*

This paper has benefited from seminar presentations at the University of Exeter, and from comments made by David Gwilliam, David McCarthy, Kevin McMeeking, Charles Sutcliffe and two referees. Errors remain the responsibility of the authors.

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