UK - Flat-rate fees for the Pensions Protection Fund will virtually condemn it to failure, experts fear.
And they warn that companies are waiting in the wings to dump their scheme as soon as the insurance fund goes live.
Critics say launching the PPF without government backing and limited to a fixed-fee levy is fundamentally flawed and that it will be chronically underfunded if a large scheme fails within the first year.
PricewaterhouseCoopers partner Peter Tompkins says the PPF will “never work” with just a fixed levy.
Watson Wyatt partner John Ball agreed and said that it was vital for the PPF levy to take into account scheme funding levels, their investment policies and the strength of their sponsors’ covenant.
He said: “It is odd that the PPF is being introduced without them sorting this out, because it’s absolutely fundamental. You need to avoid moral hazard. It is worrying that it is being introduced in a half-baked way and the key issues haven’t been sorted out.”
Government pensions adviser Ros Altmann said: “We know there are companies out there waiting for the PPF so they can dump their schemes.
“If we get enough of them there won’t be enough. The combination of no risk levy and scheme-specific funding is an open invitation to underfunding. The onus is on trustees to ensure that schemes are better funded.”
And independent consultant John Ralfe attacked government claims that companies could keep their PPF costs down by investing in equities. By allowing for equity risk, Ralfe estimated the PFF would cost companies a combined £660m, instead of the £375m stated by the government.
Mercer Human Resource Consulting worldwide partner Peter Thompson (pictured) added: “The board of the PPF has quite an interesting job on its hands, which will be made more complicated if there is a large insolvency in the early days.
“I suspect that the PPF board will not invest in equities because that will just institutionalise the sorts of issues that have arisen over the last few years.”
A handful of industry heavyweights have begun trialling a so-called 'mid-life MOT', with positive initial results reported by all those involved.
The Pensions and Lifetime Savings Association (PLSA) has announced it will shrink its board by more than one-third as part of a governance overhaul to make it "agile and more appropriate".
Smaller FTSE 350 defined benefit (DB) schemes were nearly 15 percentage points less well-funded than larger schemes in 2017, according to a Goldman Sachs Asset Management (GSAM) analysis.