Crisis looms for pensions safety net

A NEW crisis is looming for Britain's pensions industry as the government safety net set up to support failed company schemes has admitted it will struggle to prop up a growing number facing collapse.

New research has revealed that up to 70 pension schemes may need support every year as their sponsoring employers go bust, putting huge pressure on the government's ability to underwrite them.

The Pension Protection Fund admits in its long-term strategy that it could have difficulties supporting a failure rate significantly above the average since it was launched in April 2005.

However, the crisis could be even sharper, and crashes among large mature schemes have not been factored into the PPF's calculations. To ease pressure on the fund it plans to increase the levy, placing an extra burden on employers.

According to the PPF, around one in 100 pension schemes faces the prospect of going bust each year out of the 7,100 that could be eligible for a bailout. It pays pensions if an employer fails without fully funding retirement promises. It said 166 schemes have transferred into it since its launch, with another 379 currently under assessment for inclusion.

A more acute danger is that vast mature schemes, set up decades ago by big industries but now funded by much smaller companies, will topple.

The PPF strategy review states: "It is likely that over the long-term these companies will employ fewer staff and that for a growing number of them the size of the pension scheme they sponsor will be disproportionately high compared to the size of their operational balance sheet, making the sponsor covenant weak. This likely trend is not captured in our modelling."

Alan Rubenstein, the PPF chief executive, said: "Clearly, life never works out quite as you are expecting. We may have to operate during future downturns, when the numbers of companies collapsing goes up. But similarly we will go through times when the economy is more buoyant, fewer schemes collapse, and employers will be in a position to put more into their funds again."

Milan Makhecha, an actuary at Aon Consulting, said: "When you are talking about 20 years hence an awful lot can change. But we do know that the PPF can't sustain itself with the current levy on a diminishing population."

The PPF has a 1.2 billion deficit, a 12 per cent black hole, according to its last accounts, while the numbers of final salary schemes contributing to the fund are dwindling.

Rubenstein wants to ask today's levy payers to pay more, so that he can eliminate the deficit within 20 years. He said: "If we can become self-financing within that timescale then we would be resilient. I see no need for any government guarantees."

But Makhecha said. "The closure of final salary schemes could increase significantly when Nest arrives in 2012. On the other hand, if the economy improves, everything gets easier."We need the PPF to annually publish how off-track from the target it is so the levy can be increased or decreased accordingly."