UK - Corporate pension schemes and the PPF face an uncertain future as the UK government waits for an ECJ ruling that may force the PPF to pay full benefits to DB scheme members.
The European Court of Justice (ECJ) will decide on 25 January whether it will uphold the decision made by its advocate-general last July to grant those employees affected by company bankruptcy full benefits.
The Pension Protection Fund (PPF) currently pays up to 90% of benefits to scheme members in the case of employer insolvency and this figure is capped at around £25 000 pa. The government put the cap measure to stop PPF costs spiralling out of control.
Conservative estimates show a ruling against the government would lead to an increase of at least £2bn in the PPF's annual levy. The announcement in December that the PPF had set its levy at £675m for 2007/2008 provoked an angry reaction from the industry.
Commenting on the potential impact of the ECJ ruling, Alexander Forbes Financial Services actuarial director Colin Mouque said: "The PPF was destined for oblivion in ten years - if the EU's ruling is enforced, it will not last even two.
"It's no surprise that the news of the EU ruling coincides with WHSmith's decision to close its scheme to all accrual.... it is likely in future that any company that wishes to remain in the FTSE100 will have to follow suit."
Watson Wyatt senior consultant Stephen Yeo predicted "the trickle of schemes winding up would grow into a torrent" should the ECJ decide against the government.
As a consequence, Yeo stated the wind up market would grow, benefitting buyout firms such as Paternoster, Synesis, Prudential and Legal & General.
Also set to benefit would be Pension Insurance Corporation, which has business worth £13.7bn in the quoting stage. CEO Edmund Truell said: "If people are going to have to pay a realistic premium to insure their pension fund with the PPF, they may prefer to pay a realistic premium to insure their pension fund with a highly capitalised [firm].
"[The ECJ ruling] is beginning to expose with whole frailty of hope that if we live with FRS17 we'll be alright. ... You need to have a far greater level of capital behind the scheme, whether it's actually in the pension fund itself or an external insurer or the PPF insurance scheme. Our estimates are that [the corporate pension system] could absorb a further £100bn of capital."
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