UK - "Young" final salary schemes could face a tenfold increase in Pension Protection Fund costs when risk-based levies are introduced, trustees warn.
And trustees from mobile phone giant T-Mobile are urging the government to rethink PPF calculations to take the strength of scheme sponsors into account.
A letter by trustees’ chairman Jim Morrison to work and pensions secretary Alan Johnson (pictured), says the likelihood of the £116m scheme claiming on the PPF is “remote” given the strength of the firm and its parent company, Deutsche Telekom.
Morrison believes PPF levies must take into account the strength of sponsoring employers; treat past and future entitlements in an equal manner; national insurance rebates; and the period of time over which a claim will become payable.
The scheme’s actuary, Mercer Human Resource Consulting, says that unless PPF levies are recalculated to take into account the above factors, T-Mobile will face a tenfold increase in its contribution costs. This will also apply to other companies with young DB schemes.
The consultant attributes this to the fact that the risk-based element of the levy will apparently be based on the solvency costs of securing PPF benefits.
The proposed discount rate used when calculating this value will be set at 0.8% per annum above inflation - whereas schemes normally use a discount rate of 4% in their liability calculations. This means T-Mobile’s liabilities will be 30pc higher than the average scheme, where the average age of members is 45.
Other factors include the fact that unlike older schemes, T-Mobile will not benefit from the removal of all pre-1997 pension increases. The mobile phones giant says that this “effectively penalises” it for having an open DB scheme, and that it will increase its liabilities by 15%.
At the same time, because the contracting-out rebates the scheme receives are so low, T-Mobile is accruing liabilities in excess of the assets it is building up.
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