Quick off the mark

The Pension Protection Fund is now well into its second year of operation. It seems to be coping well, unlike the much more troubled Financial Assistance Scheme.

However, the PPF’s workload is expected to rise dramatically over the next few years.

The PPF took up its role in April 2005 and is due to publish its first annual report in October. The first 15 months have been spent on the dual tasks of, on the one hand, building up and refining the rule book for the levy payments, and, on the other, establishing the framework for assessing schemes where the employer has gone down, including much detailed work on deciding which individuals are eligible and what level of payment they should receive.

By the end of the 2005-06 financial year, there were around 40,000 “customers” sitting in schemes undergoing assessment. This number almost doubled in July, however, when the Turner & Newall schemes, with 35,000 members and a difficult and complex history, were accepted into assessment.

According to the PPF’s own projections, by the end of 2008-09 it could be responsible for 145,000 scheme members.
So far, criticism of the PPF – leaving aside those who think the whole concept is wrong – has been concerned with its investment strategy and the basis of calculation of the levy.

There has been little comment on or criticism of its administration or communication activities.

That contrasts with the unhappy experience of the FAS, created at the same time to provide help for people whose schemes and employers collapsed in earlier years.

By June this year FAS payments had begun for only 86 people, with costs per head escalating.

An internal department for work and pensions review by civil servant Bill Gaskin found that the FAS unit had been set up in York using the civil servants who happened to have been made redundant from the nearby Pensions Service office, and who had little knowledge of occupational pensions or confidence in using IT systems.

The DWP had also made the happy assumption that the trustees of dead pension schemes within defunct companies would be both willing and able to co-operate, and all the data would be in apple-pie order.

“It is clear,” Gaskin says, “that this passive approach has not resulted in data of sufficient quantity or quality to assess member eligibility and make payments to the numbers anticipated.”

Improvement is urgently needed, since 25,000 more people are expected to become eligible after the recent announcement that the scheme would pay out to people within 15 years of pension age at retirement.

The review recommended that the FAS is to explore ways to bring in the necessary skills from the private sector or the PPF, though it will stay as a unit within the Pensions Service. The PPF has been operating very differently from the start.

“Our 83 staff are a very mixed group,” says PPF head of communications Paul Reynolds. “There are very few civil servants, but there is a complete cross-section of administrators, pension professionals, economists, pensions lawyers and corporate lawyers, actuaries, former trustees, accountants, IT specialists and investment specialists. They have come mainly from the private sector, and are people with experience in the particular fields we need.”

The assessment teams, he says, mainly consist of people who have been working in pensions administration, and the actual task of making payments is to be outsourced to third-party administrator Capita Hartshead.

“It makes sense to use an external provider where it is already their business,” Reynolds says. “It seems pointless to reinvent the wheel.”

However, the first cheques will not go out from the PPF’s funds until the end of the year. All the schemes under assessment are currently making their own payments, at PPF levels.

“The move to cheques coming from a different source is almost a non-event,” Reynolds says.

In common with the FAS, however, the PPF is finding that the schemes it is dealing with are complex and data is not always forthcoming.

“The trouble is, as the last year or two has shown, pensions are a data-free zone,” chair-man Lawrence Churchill told the House of Commons work and pensions committee recently.

“It is astonishing how little we all know about the true situation with pensions.”

Higham Dunnett Shaw director and actuary Russell Agius thinks the PPF’s teams are coping with this very well.
“I would give the PPF 8.5 out of 10 at present,” Agius says.

What is good, he adds, is that the PPF is being very proactive and thinking about what trustees need to know.

“They are keen to make sure that trustees and administrators understand what they are doing,” he says. “There is a lot more information and guidance available than we initially anticipated.

“Some organisations, like ours, will be dealing with it all the time, but others will not need it until they get involved with the PPF, and everything is there when they need it.”

Higham Dunnett Shaw, which specialises in this area, has been asked to tender for a lot of PPF cases, he says.
“The trustees are hoping to hit the ground running, and are pressuring the administrators as a result of the PPF overseeing them,” Agius adds.

People are aware that the PPF is feeding back its experiences to The Pensions Regulator, and this concentrates their minds.

“They are making our job much easier, with everyone aligned in exactly the same direction,” Agius concludes.
“It is helping to raise the bar, and is an approach that needs to be rolled out in other areas like scheme wind-ups.”

All this makes for high costs. The PPF’s running costs in 2005-06 were around £7.5m, which worked out at a cost of
£200 for each member transferred into its hands.

Of this global sum, £1.5m or around 20pc went to consultancy, advisory and other outsourced services.

The overall cost is forecast to go up by more than 150pc to £18m by “steady state” time in 2008-09, but within that the consultancy, advisory and other outsourced services will go up to £8m, five times the present figure.

One reason for that, according to the PPF’s medium-term strategy document, is a peculiarity in its governing legislation.
“It is a feature of the Pensions Act 2004 that the cost of administering compensation cannot be charged to the assets of the Pension Protection Fund in the way that pension schemes normally charge costs directly to the assets of the pension scheme,” the document says. “Therefore, these costs will be funded indirectly through the administration levy. This explains the growth in consultancy and advisory services which reflect the variable costs associated with outsourcing compensation payments.”

The PPF board has asked the DWP to change the legislation, but it accepts “that no early change to the current policy is likely”.

They do, however, expect some economies as time goes on, with the per-head cost dropping to £138 by 2008-09.
Agius’s sole complaint is that the same approach is not being used in scheme wind-ups more generally.