Mercer Consulting says the Pension Protection Fund (PPF) proposed in the UK government’s long-awaited Pensions Bill, published today, may not be affordable.
“The introduction of the PPF is a bold move by Government, aimed at restoring member confidence in final salary pension schemes,” says Wendy Beaver, European Partner at Mercer Human Resource Consulting. “Today’s publication of the Pensions Bill provides some helpful clarification of how the PPF is intended to work. Sponsoring employers are concerned about the potential costs, and rightly so. The PPF will not be effective unless it is affordable. While the Pensions Bill helps to clarify some areas, essential features are yet to be announced such as the cap on potential compensation that pensioners could receive.”
Mercer believes the design of the PPF and how it operates is crucial if those employers still committed to final salary pension schemes are to have confidence in it. Of particular importance is the levy charged and whether it will be risk-related or a flat-rate charge per member.
“We understand from today’s statements that a flat rate charge will apply only for the first year of the PPF’s operation,” says Beaver. “After that, the intention is to make the levy vary according to the funding level of the scheme. “A move to a risk-related levy is essential if the PPF is to succeed. Well-funded schemes are less likely to claim on the fund, so it is right that their sponsoring employer should pay a lower levy. A risk-related levy will help encourage the right funding behaviours by sponsoring employers of poorly funded schemes, who should gain through lower levies in future if their scheme’s funding level improves.”
Mercer notes, however, that the employer’s strength is another factor to be considered. Financially stronger employers who are less likely to fail should also pay less in levies than those employers at greater risk of insolvency.
“The financial strength of the employer is another important risk factor to take into account, though its assessment is more difficult,” says Beaver. “The Government has left it to the Board of the PPF to determine whether there is a feasible way forward. That is to be welcomed as it would be unhelpful in the longer term to rush through rules that could later prove to be flawed.”
Mercer also believes that the scope of coverage of the PPF will be an important design feature. The level of compensation that pensioners receive from the PPF needs careful consideration,” says Beaver. “If it is too generous, the costs may be prohibitive. It would also reduce the incentive for weaker employers with underfunded schemes to restore the scheme’s funding position, as they could rely on generous compensation from the PPF to bail out their members. The Government should consider the minimum level of compensation necessary to ensure employers’ costs are affordable. The Government intends to fix a cap on the maximum level of compensation paid out. This should be more than a mere subsistence amount and should allow pensioners dignity in retirement. But it should not be the aim of the PPF to provide generous compensation to employees on high salaries.”