Pensions: Risks to company pension funds grow in credit crunch
Pension fund 'war chest' to be increased as credit crunch fear bites
Friday, 30 May 2008 16:53
Pension funds have been told to increase the amount they pay to the Pension Protection Fund (PPF).
The PPF stated that given the significant volatility in risk during the last year and its need to raise £675 million.
The body – officially classed as a public corporation charged with paying compensation to members of certain pension schemes when an employer goes under – claims it needs more cash as the chances of pension funds being at risk is growing.
PPF chief executive Partha Dasgupta said: "In the short-term, we have seen scheme funding and insolvency probabilities improve.
"But, it is long-term risk that we have to protect ourselves against, particularly as we are now in the middle of a credit crunch which can only mean a lot more uncertainty for the future."
Analysis by Watson Wyatt shows a scheme with £100 million of PPF-protected liabilities, £105 million of assets and a D&B failure score of 80 (where one equals a high chance of bankruptcy and 100 a low chance) will have to provide a levy invoice of £161,268 in 2008/09.
However, under the indicative formula published by the PPF in November, this would have been £76,640. Under last year’s levy formula, it would be £20,446.
For some schemes, the total levy will be eight times as big as under last year’s formula.
John Ball, head of UK defined benefit consulting at Watson Wyatt, said: “Employers who have taken steps to reduce risks in their pension schemes will feel that they are running to stand still.
"Pension schemes have become the latest victim of the credit crunch, with the PPF suggesting it needs to build up a war chest before things get worse."
He added the PPF had moved the goalposts on contributions.
Milan Makhecha, consultant and actuary at Aon Consulting said: "It is astonishing to see such a massive increase in the risk-based scaling factor.
"Given this factor directly affects the level of risk-based levy paid by a pension scheme, they will now face a hefty bill for nearly two and a half times as much as originally anticipated. It is very hard to see how this fits in with the PPF's aim of maintaining stable and predictable PPF levies."