Global Pensions article on PPF

by Dr. Ros Altmann

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The introduction of the Pension Protection Fund (PPF) heralds a new era for UK defined benefit (DB) pension funds. At last, members of DB pension arrangements have some proper protection. If their employer fails, they no longer risk losing most or all their pension. This has to be great news. After seeing people's lives destroyed by losing the pensions they were relying on, I do not believe employers could have continued to offer such pensions, without protection. It is, of course, vital to be honest from the start about what the PPF can do. It will not replace scheme benefits in full (and PPF payouts could be cut in future), but it is still a huge step forward for members' security.

MG Rover looks like being the first applicant for PPF help. This will not pose any problems, since the PPF is set up to cater for situation like this.. The PPF is robust for most eventualities at least for 10 or 20 years, because it will be taking in assets - it's not just paying out benefits - and most schemes, even with large deficits, have enough money to meet all their pension obligations for many years initially.. However, the PPF may not have sufficient assets to pay benefits for the next 40-50 years, which is the typical timeline for most pension funds.
The PPF is designed to handle a few very large companies failing every few years. It also has the leeway to increase the levy or cut the benefits, and while obviously I'd prefer to see a government underpin to the PPF, the fund isn't going to run out of money or 'go bust' as soon as it starts, as some of the more scaremongering stories are trying to suggest.. This means that workers in MG Rover and other companies which may become insolvent with pension scheme deficits in coming years, should know that much of their promised pension benefits will be paid. Although they will not receive the entire amount they were expecting, this is so much better than the 80,000 or more people whose company schemes have wound up in the past and many of whom are facing the loss of most or all of their pension.

The implications of having the PPF for corporate UK are less unequivocally positive. Almost all private sector DB funds are in deficit and the new Regulator, trying to minimise claims on the PPF, is tasked with ensuring companies cannot easily escape the responsibilities of funding pension promises properly. So employers - and ultimately shareholders - will have to bear higher costs for reducing their pension deficits. This may affect dividend payouts and expansion plans and possibly also increase the cost of borrowing. Although this may be difficult for some companies but, it is merely recognition of the true costs of providing defined benefit pensions, which is long overdue.

As regards trustees, the PPF and the new Regulatory environment will make their role enormously more challenging. Asset allocation decisions may be affected, with trustees looking more carefully at risk control, relying less on equity outperformance and paying closer attention to matching the pension liability profile. Trustees will need to demand higher contributions to make up deficits and be vigilant about the impact of proposed corporate transactions on the security of future pension payments.

Finally, trustees will be in a very difficult position, when trying to cope with weak employers and schemes with large deficits. PPF benefits are only payable if the employer is insolvent, so 'compromise deals' - trying to save the company by agreeing underfunded scheme wind-ups - will become a thing of the past. Therefore, job security of active members of DB pension schemes may be reduced.

The bottom line, however, is that the PPF is a welcome and essential feature, to finally gives some proper security to our UK DB pensions.


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