Skip to main content
×
×
Home

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

  • WEIXI LIU (a1) and IAN TONKS (a1)
Abstract
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.

Copyright
Corresponding author
(e-mail: W.Liu@ex.ac.uk)
(e-mail: I.Tonks@ex.ac.uk)
Footnotes
Hide All
*

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.

Footnotes
References
Hide All
Altman E. I. (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23: 589609.
Altman E. I. (1983) Corporate Financial Distress: A Complete Guide to Predicting, Avoiding, and Dealing with Bankruptcy. John Wiley & Sons.
Baty P. (2007) Survivors beat budget woes. Times Higher Education Supplement, 13 July 2007.
Beaver W. H. (1966) Financial ratios as predictors of bankruptcy. Journal of Accounting Research (Supplement), 71102.
Binsbergen van J. H., Brandt M. W., and Koijen R. S. J. (2008) Optimal decentralized investment management. Journal of Finance, 63: 18491895.
Blake D. (2000) Two decades of pension reform in the UK. Employee Relations, 22(3): 223245.
Blake D., Cotter J., and Dowd K. (2007) Financial risks and the Pension Protection Fund: can it survive them? Discussion paper PI-0711, Cass Business School, City University.
Blake D. and Orszag J. M. (1998) Portability and Preservation of Pension Rights in the United Kingdom. The Pensions Institute.
Bunn P. and Trivedi K. (2005) Corporate expenditures and pension contributions: evidence from UK company accounts. Bank of England Working Paper no. 276.
Dorsey S. (1995) Pension portability and labor market efficiency: a survey of the literature. Industrial and Labor Relations Review, 48(2): 276292.
Education Guardian (2007) ‘The critical list’, 10 July 2007.
Goddard A. (2004) Big cuts punish poor student enrolments. Times Higher Education Supplement, 5 March 2004.
Guay W. R. (1999) The sensitivity of CEO wealth to equity risk: an analysis of the magnitude and determinants. Journal of Financial Economics, 53(1): 4371.
Kapur S. and Timmermann A. (2005) Relative performance evaluation contracts and asset market equilibrium. Economic Journal, 115: 10771102.
Kraatz M. and Zajac E. J. (1996) Exploring the limits of the new institutionalism: the causes and consequences of illegitimate organizational change. American Sociological Review, 61: 812836.
Kealey T. (2006) Market forces will spell the end of invincibility. Times Higher Education, 22 September.
Lakonishok J., Shleifer A., and Vishny R. W. (1992) The structure and performance of the money management industry. Brookings Papers on Economic Activity: Microeconomics, 339391.
Lennox C. (1999) Identifying failing companies: a re-evaluation of the logit, probit and DA approaches. Journal of Economics and Business, 51: 347364.
McCarthy D. and Neuberger A. (2005a) The Pension Protection Fund, Fiscal Studies 26(2): 139167.
McCarthy D. and Neuberger A. (2005b) Pricing pension insurance: the proposed levy structure for the Pension Protection Fund. Fiscal Studies, 26(4), 471489.
McClintock M. and Ritchie W. (2003) Capital building and cash flow at the University of Lancaster. In Warner D. and Palfeyman D. (2003), Managing Crisis, Open University Press.
McKibben W. (1972) Econometric forecasting of common stock investment returns: a new methodology using fundamental operating data. Journal of Finance, 27: 371380.
McMeeking K. J. (2003) A break-even analysis of UK universities. University of Exeter Accounting Discussion Paper, no. 04/03.
Merton R. (1974) On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance, 29: 449470.
Ohlson J. S. (1980) Financial ratios and the probabilistic prediction of bankrupty. Journal of Accounting Research, 18(1): 109131.
Pensions Act 2004, Chapter 35, The Pensions Regulator.
Pension Protection Fund (2005a) The Pension Protection Levy Consultation Document. The Board of the Pensions Protection Fund, July 2005.
Pension Protection Fund (2005b) The Pension Protection Levy Consultation Document. The Board of the Pensions Protection Fund, December 2005.
Pension Protection Fund (2005c) A Guide to the Pension Protection Levy 2005/06. The Board of the Pensions Protection Fund, December 2005.
Pension Protection Fund (2006) A Guide to the Pension Protection Levy 2006/07. The Board of the Pensions Protection Fund, December 2006.
Rauh J. D. (2006) Investment and financing constraints: evidence from the funding of corporate pension plans. Journal of Finance, 61: 3371.
Ross S., Westerfield R. W., and Jaffe J. (2005) Corporate Finance. McGraw Hill.
Sharpe W. F. (1981) Decentralized investment management. Journal of Finance, 36: 217234.
Select Committee on Education and Skills (2005) Minutes of Evidence given by Sir Howard Newby, 19 October 2005.
Smith B. and Cunningham V. (2003) Crisis at Cardiff. In Warner D. and Palfeyman D. (2003), Managing Crisis, Open University Press.
Smith C. and Stulz R. (1985) The determinants of firms' hedging policies. Journal of Financial and Quantitative Analysis, 20: 391405.
Stracca L. (2005) Delegated portfolio management: a survey of the theoretical literature. Working Paper, European Central Bank, 40.
Sudarsanam S. and Huang J. (2006) Managerial incentives, overconfidence, risk-taking, and acquirer shareholder value creation in mergers and acquisitions. Cranfield University Discussion Paper.
Taffler R. J. (1982, Forecasting company failure in the UK using discriminant analysis and financial ratio data. Journal of the Royal Statistical Society, series A 145: 342358.
Tonks I. (2006) Pension fund management and investment performance. In Clark G. L., Munnell A. H. and Orszag J. M. (eds.), Oxford Handbook of Pensions and Retirement Income. Oxford University Press, Chapter 23, pp. 456480.
Warner D. and Palfeyman D. (2003) Managing Crisis, Open University Press, McGraw-Hill Education.
Wilcox J. W. (1973) A prediction of business failure using accounting data. Journal of Accounting Research (Supplement), 11: 163179.
Wruck K. (1990) Financial distress: reorganization and organization efficiency. Journal of Financial Economics, 27: 419444.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Pension Economics & Finance
  • ISSN: 1474-7472
  • EISSN: 1475-3022
  • URL: /core/journals/journal-of-pension-economics-and-finance
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 1
Total number of PDF views: 11 *
Loading metrics...

Abstract views

Total abstract views: 122 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 16th January 2018. This data will be updated every 24 hours.