Boost for pension rescue plans

By DAVID BURROWS
Updated:

 

WELL-managed company pension schemes will no longer be subsidising poor ones and that could prove good news for pensioners and companies alike.

There were concerns that companies that had made contingency plans for their employees' final-salary pensions would be slapped with a levy charge to help cover all the deficits of all companies with pension schemes still open.

But the Pension Protection Fund (PPF), set up by the Government in April this year, has confirmed that new measures will be introduced to reward companies that take steps to safeguard their pension pot.

Under new PPF guidelines, companies that provide 'substantial cash contributions' to plug any deficits in their pension fund, may see any levy charged to them significantly reduced. A spokesman for PPF said: 'If we are convinced that a very significant cash contribution is made to the company's final salary pension fund, then we will take this into consideration when setting levy charges.'

But what reassurances will the PPF be given to ensure that any respective company invests what it promises?

'The scheme's own actuary must sign off the contribution commenting on whether they view the amount as an over-estimate or under-estimate of funds required. The bottom line is that any deficit in a pension scheme is plugged and if we are not satisfied that enough is being done then any levy is likely to apply in full.'

How will any of this benefit employees with pensions?

Primarily companies that are well run with well-funded pension schemes will no longer find themselves having to bail-out other pension schemes. Their profits will not come under pressure and their workforce will not be forced into unfair belt tightening.

Secondly, by actively dealing with any pension fund shortfall now, companies are providing reassurances of pension payments that have long been sought after.

The PPF spokesman said the deadline for companies to respond with scheme valuations had been extended but denied that this was in any way a stalling tactic on the part of the relevant companies.

However things are far from rosy for all those with final salary pension schemes. The PPF will compensate people whose pension scheme collapses on or after 6 April 2005, but 80,000 workers whose funds failed before that date are facing a battle for their cash.

So far there is no magic wand that can be waved in favour of pension holders who lost money prior to this deadline. As things stand, they will have to fight for the scraps from the Financial Assistance Scheme (FAS), set up to help those whose company pension was wound up between 1 January 1997 and 5 April 2005.

The Government has pledged just £400m over the next 20 years, equating to £20m a year, which experts claim is nowhere near enough.

Another bone of contention is the fact that under FAS, the maximum benefit is just 80% of the pension entitlement a worker had been expecting and is capped at £12,000 a year. No protection against inflation has been provided and spouses and civil partners will receive only 50% of their partner's benefits if they die.

The National Association of Pension Funds (NAPF) welcomed what it sees as an indication that the PPF board is willing to listen to the industry. The NAPF said the latest announcement took on board many of the issues it had raised. In particular, the NAPF welcomed the commitment to consult on taking contingent assets into account, as recommended in the NAPF's response to the PPF's original consultation.

NAPF Chief Executive, Christine Farnish, said: 'There is understandable concern in the pension industry and beyond about the impact the new PPF levy will have on UK pension provision. While few would argue with the principle of greater security for pension scheme members . . . there are genuine causes for concern about how the cost of funding the PPF will place a greater, and in some cases intolerable, burden on well run, well funded pension schemes.

'Today's update offers welcome evidence that the PPF Board is at least prepared to listen to these concerns. By displaying its willingness to engage with stakeholders and, where possible, to draw on the expertise of those in the pension industry, the PPF is going some way towards easing the worries of many pensions professionals.'

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