UK - The creation of a compulsory occupational pension insurance scheme for the UK - similar to the discredited Pension Benefit Guaranty Corporation (PBGC) in the US -- has been criticised as anachronistic and widely slammed by consultants.
The Pension Protection Fund (PPF) will secure a maximum of 100% of pensions in payment and 90% of the benefits of those still working, where the employer becomes insolvent while a defined benefit scheme is underfunded.
The cost levied by the PPF will be a mixture of a flat-rate charge on employers plus a risk-based premium depending on scheme underfunding. It is expected to come into force in Q1 2005 at the earliest.
Consultant Towers Perrin has said that it would have been an effective response to the Maxwell scandal in late 1991, but pension fund shortfalls are now so large that the pension plans most in need of protection could not afford the true cost of cover.
The insurance scheme does not have a great model in the PBGC which during 2002 went from a surplus of US$7.7bn to a deficit of US$3.6bn.
Steven Kandarian, executive director of the PBGC said: “This loss is more than five times larger than any previous one-year loss in the agency's 28-year history.
“Moreover, based on our mid-year unaudited financial report, the deficit has grown to about $5.4bn. Furthermore, data now coming in to PBGC confirm that the total underfunding in the single-employer defined benefit system exceeds $300bn, the largest number ever recorded.”
Mark Duke, partner at Towers Perrin, said: “To make an insurance scheme work, either the solvent will have to subsidise the insolvent on a massive scale or the level of cover will have to be way below most members' current pension expectations. The creation of a compulsory insurance scheme also runs contrary to recent government pensions regulatory activity. The Government intends to impose no statutory funding requirement. It is like insuring someone against theft but not enquiring whether they fitted locks to their doors.”
John Ralfe, now an independent pension consultant but formerly head of corporate finance at Boots, agreed. He said unless the UK government draws the right lessons from the US experience – the need for strong regulation and government backing – a compulsory insurance scheme could make matters worse. Ralfe, the man behind Boots Pension Fund’s shift from equities to matching bonds, has just launched his own consulting firm.
Earlier this year, Alan Pickering, chairman of the European Federation for Retirement Provision, warned: “The PBGC in America isn't 100% popular. It's had some successes and it's had some failures. I think what one has to think very carefully about is, yes, mutual protection in the odd case of fraud in order that the system is trusted by the people, but once you have a system of mutual insurance which is intended to protect against market volatility – volatility being a nice way of saying market drops! – you really do have to question whether the system can really cope when it's needed. Is there enough insurance capacity out there to bail us all out of a bear market? I doubt that there is.”
Tim Keogh, European partner at Mercer Human Resource Consulting, said: “The Government appears to be proposing a very high level of member protection. The cost estimate of £340-375m understates the potential liability. We would anticipate a figure of £1bn or more in the long term if this is properly costed on a market basis. However, we must await more details.”
Kevin Wesbroom, senior consultant at Hewitt, said: “For the Pension Protection Fund to cover 100% of pensions in payment and 90% of deferred pensions together with indexatio
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