UK - Default trends among UK companies have cast doubts over the new Pension Protection Fund's (PPF) ability to meet claims from company pension schemes, says Standard & Poor's.
The PPF was established by the UK government to compensate members of defined benefit pension schemes that are in deficit when their sponsors default and will be funded through an annual levy of £300m from April 2006.
But according to a new study by S&P, default trends among UK companies reveal annual claims on the PPF would substantially exceed £300m, even using relatively optimistic assumptions.
“If past experience is anything to go on, there is a real risk of the PPF accumulating a sizeable deficit of its own quite quickly,” said Jim MacLachlan, director of European pension services at S&P.
“Although corporate default are currently at a low ebb, it is likely that the annual levy will have to increase significantly in the early years. That may pose its own problems, as schemes under the new regulatory regime have to simultaneously trim their own deficits and pay a higher contribution to the PPF. There is a danger they will be squeezed at both ends.”
According to the study, assuming schemes will recover 40% of the deficit from their defaulted sponsor, the annual claim on the PPF would be £670m, more than double the £300m inflow to the fund. If the recovery rate was only 20%, the PPF would have to pay out around £890m a year.
“While the PPF is not required to be solvent in the sense of an insurance company, there must be a limit to the losses it can shoulder without additional funding,” MacLachlan added.
“The experience of the PBGC in the US has shown the speed and extent with which funds can be hit.”
The S&P study was based on the rate of default since 1981 of companies with different credit ratings. The agency then applied these risk probabilities to the largest 340 UK corporate and financial sector pension schemes, which cover about 65% of pension scheme assets and deficits.
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