Global Pensions article giving Ros's on the risk-based PPF levy - Ros Altmann
  • ROS ALTMANN

    Ros is a leading authority on later life issues, including pensions,
    social care and retirement policy. Numerous major awards have recognised
    her work to demystify finance and make pensions work better for people.
    She was the UK Pensions Minister from 2015 – 16 and is a member
    of the House of Lords where she sits as Baroness Altmann of Tottenham.

  • Ros Altmann

    Ros Altmann

    Global Pensions article giving Ros's on the risk-based PPF levy

    Global Pensions article giving Ros's on the risk-based PPF levy

    Global Pensions article on PPF

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)


    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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