Pension Protection Fund in the Red

The Pension Protection Fund (PPF) today announced that its deficit has more than doubled to £1.2 billion. Could this threaten the future of the scheme?.

The PPF, which is funded by pension schemes, was introduced by the Government in April 2005 to protect employees with final salary pensions should their employer go bankrupt. Good job too, as since then more than 30,000 people have been transferred to the scheme, with around 13,000 already receiving compensation (and many more waiting in the wings).

The deficit exists because the PPF’s existing pension assets (the pension funds of schemes they’re already bailing out and annual levies) plus those of pension schemes they reckon they’ll have to bail out in future are less than the total estimated liabilities (i.e. future payments to members) of both. Put simply, if future expectations were rolled up into one big payment today, the PPF would be short by around £1.2 billion (actually, probably less, as this figure applies to 31 March 2009 – markets have risen since).

Most of the anticipated compensation payments are in years to come, not right now, so the PPF does have some time to address the potential shortfall. Rising markets would obviously help plug the gap and could reduce the number of final salary schemes that ultimately need bailing out.

Nonetheless, it’s a problem. Because the PPF is funded by final salary pension schemes themselves, the more pension schemes that get into trouble the fewer left to pick up the tab. This could increase the annual levies demanded from the remaining schemes, potentially jeopardising their health – a downward spiral.

Based on its own projections, there’s a reasonable chance the PPF can move from deficit to surplus within about 10 years. But if economic conditions are worse than expected, and I wouldn’t bet against that, then I can see the PPF doing one or more of three things:

1.Cutting the level of compensation it pays out – unlikely, as too unpopular.
2.Increasing its annual levies on ‘healthy’ final salary schemes – probably limited on how far they can push this.
3.Going cap in hand to the Government – most likely, although the Government would probably only cough up as a last resort.

If you’re setting up in business today the thought of providing a pension for your employees where you, the employer, take all the risk, is laughable. However, it’s no laughing matter if you’re in a final salary pension and concerned over your employer’s financial stability. The PPF provides a vital role and I’m sure it’s here to stay – just hopefully without need for outside intervention.