Employers have called for an overhaul of the government’s safety net for final salary pension schemes in a development that could see this last-ditch protection for final salary pension schemes watered down.
This week the Confederation of British Industry added its voice to bodies such as the National Association of Pension Funds which have warned that the costs of running the Pension Protection Fund risk escalating out of control.
The PPF, which was set up in April this year, provides an income guarantee to members of final salary pension schemes if their employer goes bust. Currently, for people who have yet to retire, the scheme pays out 90 per cent of their retirement income entitlement up to a cap of £25,000 a year. For people who are already drawing an income from their final salary pension, there is no cap on benefits and they receive 100 per cent of their income.
The CBI estimates that the costs to companies of the scheme in the first year could be £600m – double the government’s initial estimate. Employers and pensions bodies argue that the rising costs of running the PPF – which is funded by a levy on companies operating final salary schemes – could accelerate the closure of final salary schemes, not just for new employees but also for existing members.
“More people are saying what we have been saying for some time,” said Christine Farnish, chief executive of the National Association of Pension Funds. “An inevitable consequence [of these rising costs] is that companies will be quietly getting out of final salary schemes.”
Research released this week by the Pensions Institute, based at the Cass Business School, suggests that, within five years most final salary pension schemes will be frozen to existing members with future contributions diverted to money purchase schemes.
“Next year we estimate the levy will be between £600m and £1bn,” said Adrian Waddingham, chairman of the Association of Consulting Actuaries. “The ACA always told the government that it was not wise to make the scheme as generous as it is.”
The pensions industry is also angry that, via a quirk in pensions rules, the government has been able to pass companies into the PPF even if they became insolvent before April this year. Turner & Newall, a vehicle parts company with 40,000 pension members, first went into administration in 2001. But, because a secondary administration was triggered after April this year, it now falls under the PPF, allowing the government to pass on the burden of honouring these pensions to employers.
“The government used this device to put in a secondary claim,” said Waddingham. “This is very naughty when the government is not guaranteeing the PPF.”
Some pensions experts are speculating that the PPF will have to be watered down. Some believe this could see the £25,000 annual income cap fall to a lower level. There is also a possibility that a cap and a lower percentage payout will be applied to pensions in payment.
This week pensions campaigner Frank Field MP suggested that all members of final salary schemes pay £50 a year towards the levy.
“The other option is that the government steps in to pick up some of the costs,” said the NAPF’s Farnish.
