Hostname: page-component-7c8c6479df-7qhmt Total loading time: 0 Render date: 2024-03-28T15:52:37.723Z Has data issue: false hasContentIssue false

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

Published online by Cambridge University Press:  16 June 2009

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: W.Liu@ex.ac.uk)

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
Copyright
Copyright © 2009 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

Altman, E. I. (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23: 589609.CrossRefGoogle Scholar
Altman, E. I. (1983) Corporate Financial Distress: A Complete Guide to Predicting, Avoiding, and Dealing with Bankruptcy. John Wiley & Sons.Google Scholar
Baty, P. (2007) Survivors beat budget woes. Times Higher Education Supplement, 13 July 2007.Google Scholar
Beaver, W. H. (1966) Financial ratios as predictors of bankruptcy. Journal of Accounting Research (Supplement), 71102.Google Scholar
Binsbergen, van J. H., Brandt, M. W., and Koijen, R. S. J. (2008) Optimal decentralized investment management. Journal of Finance, 63: 18491895.CrossRefGoogle Scholar
Blake, D. (2000) Two decades of pension reform in the UK. Employee Relations, 22(3): 223245.CrossRefGoogle Scholar
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.CrossRefGoogle Scholar
Blake, D. and Orszag, J. M. (1998) Portability and Preservation of Pension Rights in the United Kingdom. The Pensions Institute.Google Scholar
Bunn, P. and Trivedi, K. (2005) Corporate expenditures and pension contributions: evidence from UK company accounts. Bank of England Working Paper no. 276.Google Scholar
Dorsey, S. (1995) Pension portability and labor market efficiency: a survey of the literature. Industrial and Labor Relations Review, 48(2): 276292.CrossRefGoogle Scholar
Education Guardian (2007) ‘The critical list’, 10 July 2007.Google Scholar
Goddard, A. (2004) Big cuts punish poor student enrolments. Times Higher Education Supplement, 5 March 2004.Google Scholar
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.CrossRefGoogle Scholar
Kapur, S. and Timmermann, A. (2005) Relative performance evaluation contracts and asset market equilibrium. Economic Journal, 115: 10771102.CrossRefGoogle Scholar
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.CrossRefGoogle Scholar
Kealey, T. (2006) Market forces will spell the end of invincibility. Times Higher Education, 22 September.Google Scholar
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.Google Scholar
Lennox, C. (1999) Identifying failing companies: a re-evaluation of the logit, probit and DA approaches. Journal of Economics and Business, 51: 347364.Google Scholar
McCarthy, D. and Neuberger, A. (2005a) The Pension Protection Fund, Fiscal Studies 26(2): 139167.CrossRefGoogle Scholar
McCarthy, D. and Neuberger, A. (2005b) Pricing pension insurance: the proposed levy structure for the Pension Protection Fund. Fiscal Studies, 26(4), 471489.CrossRefGoogle Scholar
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.Google Scholar
McKibben, W. (1972) Econometric forecasting of common stock investment returns: a new methodology using fundamental operating data. Journal of Finance, 27: 371380.CrossRefGoogle Scholar
McMeeking, K. J. (2003) A break-even analysis of UK universities. University of Exeter Accounting Discussion Paper, no. 04/03.Google Scholar
Merton, R. (1974) On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance, 29: 449470.Google Scholar
Ohlson, J. S. (1980) Financial ratios and the probabilistic prediction of bankrupty. Journal of Accounting Research, 18(1): 109131.Google Scholar
Pensions Act 2004, Chapter 35, The Pensions Regulator.Google Scholar
Pension Protection Fund (2005a) The Pension Protection Levy Consultation Document. The Board of the Pensions Protection Fund, July 2005.Google Scholar
Pension Protection Fund (2005b) The Pension Protection Levy Consultation Document. The Board of the Pensions Protection Fund, December 2005.Google Scholar
Pension Protection Fund (2005c) A Guide to the Pension Protection Levy 2005/06. The Board of the Pensions Protection Fund, December 2005.Google Scholar
Pension Protection Fund (2006) A Guide to the Pension Protection Levy 2006/07. The Board of the Pensions Protection Fund, December 2006.Google Scholar
Rauh, J. D. (2006) Investment and financing constraints: evidence from the funding of corporate pension plans. Journal of Finance, 61: 3371.Google Scholar
Ross, S., Westerfield, R. W., and Jaffe, J. (2005) Corporate Finance. McGraw Hill.Google Scholar
Sharpe, W. F. (1981) Decentralized investment management. Journal of Finance, 36: 217234.CrossRefGoogle Scholar
Select Committee on Education and Skills (2005) Minutes of Evidence given by Sir Howard Newby, 19 October 2005.Google Scholar
Smith, B. and Cunningham, V. (2003) Crisis at Cardiff. In Warner, D. and Palfeyman, D. (2003), Managing Crisis, Open University Press.Google Scholar
Smith, C. and Stulz, R. (1985) The determinants of firms' hedging policies. Journal of Financial and Quantitative Analysis, 20: 391405.CrossRefGoogle Scholar
Stracca, L. (2005) Delegated portfolio management: a survey of the theoretical literature. Working Paper, European Central Bank, 40.Google Scholar
Sudarsanam, S. and Huang, J. (2006) Managerial incentives, overconfidence, risk-taking, and acquirer shareholder value creation in mergers and acquisitions. Cranfield University Discussion Paper.Google Scholar
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.Google Scholar
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.Google Scholar
Warner, D. and Palfeyman, D. (2003) Managing Crisis, Open University Press, McGraw-Hill Education.Google Scholar
Wilcox, J. W. (1973) A prediction of business failure using accounting data. Journal of Accounting Research (Supplement), 11: 163179.Google Scholar
Wruck, K. (1990) Financial distress: reorganization and organization efficiency. Journal of Financial Economics, 27: 419444.Google Scholar