Pension scheme risk from bankruptcies

MEMBERS of final salary pension schemes risk losing out in retirement as companies face bankruptcy during the credit crunch and demands grow on the Pension Protection Fund (PPF) safety net, experts have warned.

The list of failing companies is growing and billions of pounds are being wiped off pension scheme assets as stock markets fall. Scotland on Sunday recently revealed that nearly 10bn has been erased from the value of the country's private sector schemes since the start of the year.

If a company goes under, the scheme can apply to the PPF to take on its assets and pay pension benefits to its employees. But the PPF is funded by levies from firms and there is no Government guarantee that it will not run out of money as more businesses ask for its help.

Pressure on the PPF has been increasing during the economic downturn. For example, the Lehman Brothers' 180m scheme, which was in deficit when the bank went under in September, has applied to the PPF to be bailed out and other firms are expected to follow.

Robert Hair, financial planning director with Turcan Connell, has warned of this danger to final salary, or defined benefit (DB), scheme members. But he said many financial advisers are scared of recommending their clients move out of company schemes and into their own private pension.

They are worried they will be accused of recommending the move to boost their commission.

He said: "Some financial advisers are sleepwalking into a disaster that could end with another pension mis-selling scandal by not recommending their clients to take any action. There is a presumption that clients should stick with their company's DB scheme, but that's not always the best advice."

It can be the wrong advice if the scheme is under-funded or the firm is in financial difficulty and could go bust, he said.

"The worry is a financial adviser may say they can't tell their client what to do because they are not a forensic accountant and can't make a judgment on the financial viability of their employer or their pension scheme."

Hair warned there was no guarantee the PPF can continue paying out forever as the number of companies calling on the safety net for help has "expanded drastically". "Some clients seem to think the PPF is some kind of blank cheque, guaranteed by the Government – it's not. Given the fact Government has, in effect, underwritten the banking sector to the tune of 500bn, would it be in the position to bail out the PPF as a last resort if it came to that?"

Fraser Smart, manager with Buck Consultants, agreed there was concern over the absence of a guarantee that the PPF's benefits would stay at current levels. "There's a provision for the PPF to cut back if it is under-funded. I've been lobbying for the Government to stand behind the PPF. European Law may insist that employee benefits are protected in the case of a company becoming insolvent, but that's untested."

A spokesperson for the Pension Protection Fund said: "Liquidity is not a problem for the PPF. We have 2bn in assets and are paying out 3.2m a month in compensation."