U.S. News And World Report : Pension Tension

Kim Clark

Monday January 24th 2005; Page 42

The new Pension Protection Fund is just short of a month old with not one single claim formally before it, yet it is already predicted to become insolvent.

Standard & Poor's, the credit rating agency, released its own analysis of the PPF's prospects and concluded that over the course of a credit cycle - typically eight to 12 years - claims on the fund were likely to be two to four times the final annual levy of Pounds 300m.

The PPF, the new insurance safety net for defined benefit pension schemes, was put in place through legislation last year after it emerged that those schemes were badly underfunded.

The collapse of dozens of companies has led to the loss of all or part of the pensions of more than 65,000 scheme members.

Yesterday the Independent Trustee Services, a professional trustee company, announced it had been appointed to oversee the MG Rover scheme now in administration, adding a further 6,000 workers to those with an uncertain retirement.

However, the good news for Rover's scheme members was that they were almost certain to be covered by the PPF. Still, the company's demise so soon after the launch of the PPF has once again raised concerns about the scheme's solvency. The PPF noted Standard & Poor's report and remarked: "The conclusions are entirely dependent on the assumptions."

Privately it is understood to have questioned the use of estimates of corporate default based on global rather than UK rates. It also noted the assumptions that corporate contributions to schemes would continue at historic rates rather than recent experience, which was much higher. Jim McLaughlin, director of European pensions at S & P, said forecasting the finances of the PPF was problematic. However, one thing was clear. "It is likely to be in persistent deficit from a very early date unless premiums are raised," he said.

But Douglas Elliott, head of the Washington-based Center on Federal Financial Institutions, a think-tank that looks at US government guarantee programmes, cautioned that even a large deficit at the PPF did not mean it was unable to pay benefits.

Indeed Coffi, which has analysed the US's Pension Benefit Guaranty Corporation, has concluded that even with its hefty Dollars 23bn (Pounds 14bn) deficit, the scheme was likely to be able to pay benefits in full at least until 2020.

"The difference is that insolvency is an accounting measure of whether over the entire future life of the scheme there is enough money to pay promised benefits indefinitely," Mr Elliott said. He noted that every time a scheme collapsed into the PBGC - upon which the PPF is modelled - it brought assets in with it and extended the time over which benefits could be paid.

"When they took on the United Airlines pension fund, it had enough assets to pay benefits for 10 years," Mr Elliott said. "The problem is that people persist in living for more than 10 years." But the difference between accounting insolvency and a cash flow crunch meant politicians could ignore the problems building up at the PPF for a very long time, as they did at the PBGC, he said.

It also gave companies that sponsor pension schemes the ability consistently to defer making needed contributions to their scheme. Stephen Yeo, partner at Watson Wyatt, actuarial consultants, noted the PPF differed from its US counterpart because government ministers had the power to cut benefits to scheme members.

However, he said there were doubts whether ministers would be willing to do so. "It is a toxic combination with the political process," he said, adding ministers might also raise premiums for employers.

In the US, legislation aimed at reforming the PBGC tried to remove the power to set premiums from government and shift it to the insurer itself to defuse the impact of corporate lobbying against higher costs.

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