Pension safety net is increasingly compromised as businesses suffer

14 February 2009

THE Pension Protection Fund (PPF) faces an uncertain future as the economic downturn stretches its resources.

The body was set up by the government almost four years ago to provide protection to members of underfunded defined-benefit pension schemes whose sponsoring employer fails. It pays 90 per cent of scheme benefits to deferred members and employees and 100 per cent to existing pensioners, with a limit of £28,000 a year.

It is funded by mandatory levies made on employers providing salary-related pension schemes and companies have faced significant increases to the levy after a sharp increase in the number of schemes falling under the PPF's provisions. At the same time, the levy-paying base is shrinking as more employers fail and some larger companies look to move abroad to avoid the levy.

This places an ever bigger financial burden on those smaller, weaker companies that remain. Add to this poor recent and prospective investment returns and the situation looks very bleak indeed.

The PPF's last published accounts revealed a £500 million shortcoming in funding, and that figure pre-dates a recent surge in company failures. Since then, the PPF has already come to the rescue of some big pension scheme casualties, such as Woolworths and Lehman Brothers, and three more schemes came under its wing last month alone.

Something has to be done to ensure the survival of the PPF and the protection that it provides to ordinary workers. So, what are the options? One is capping the levy on schemes by statute, meaning that even if companies could afford to pay more, which most cannot, Parliament would need to legislate to increase the cap. However, if this happened, more employers would inevitably fail because of the extra cost, with their pension schemes then increasing PPF's liabilities.

Secondly, the PPF could seek further funding from the tax payer. Given that the government has recently appeared to be willing to throw money at every distressed industry in need of such help, this might be a possibility. However, why should all taxpayers be further encumbered with the extra costs of guaranteeing gold-plated pension benefits that only a minority of us enjoy?

The third option is for the level of protection to be reduced in order to help the PPF balance its books. Such a move is already permitted by the legislation that established the PPF and now seems to be the odds-on favourite. It is not inconceivable that protection levels could be reduced from 100 per cent for pensioners and 90 per cent for employees down to 90 per cent and 75 per cent respectively.

The PPF recently announced the appointment of Alan Rubenstein as its new chief executive. Previously, Rubenstein was managing director of a certain Lehman Brothers. One cannot help but feel that the new incumbent is now holding yet another poisoned chalice.

Paul Lothian is a director of Verus Chartered Financial Planners in Dundee.

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