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A consumer’s view

The real effects of the Pension Protection Fund will only exacerbate the gathering crisis for scheme members.

The Government’s procrastination over pensions is becoming increasingly dangerous. It is making the situation worse, particularly when it comes to the supposed reassurance offered to members of final-salary occupational pension schemes by the Pension Protection Fund and it is creating even bigger problems for pension consultants.

Employees’ expectations of guarantees for the protection of their final-salary pension benefits are way beyond what the Government is providing.

The recent collapse of negotiations over the Turner & Newall pension fund with its 875m deficit has probably bankrupted the PPF before it has even got off the ground.

Dr Deborah Cooper, senior research actuary at Mercer Human Resources Consulting, has spelled out in terms that even ostrich-like Government ministers cannot ignore the crisis facing the PPF. The bald truth does not make for reassurance.

She highlights the fact that the PPF will work on the basis that when an occupational pension scheme winds up and becomes a claim on the PPF, its assets will be pooled to pay benefits to members of other schemes already claiming on the fund.

Since each scheme’s assets will be insufficient to meet its liabilities over the long term, unless the levy is increased or taxpayers are called upon to underwrite the fund, the PPF will depend on schemes continuing to go bust in order to raise cash. This is a nightmare scenario.

“The current target level of benefit security is unaffordable,” says Dr Cooper. “The Government needs to be more realistic about how much the PPF can provide and manage members expectations accordingly. It is important that pension scheme members understand the lack of guarantees inherent in the PPF. Safety nets are not much use if they cannot get off the ground.”

She went on to point out that to provide security for members of wound-up pension schemes, either employers will have to pay higher levies or taxpayers will need to foot the bill or the last few claimants on the PPF will get severely reduced benefits and eventually none at all.

Of course, the Government is hoping the problem can be deferred until another solution presents itself – or another Government is in office. But the structure of the PPF levy, which increases contributions from high-risk pension schemes – by definition those least able to pay – will ensure the situation gets worse.

IFAs advising members of occupational pension schemes cannot ignore this potentially disastrous situation and the threat to employees’ pension security. Many IFAs have already turned their backs on giving advice on whether or not to opt back into S2P (formerly Serps) for fear of being pursued for compensation for bad advice.

But the dangers that some employees face by remaining in their company scheme are far more significant and cannot be ignored. Those with most to lose are high-earners, likely to come up against the 1.5m lifetime limit, who will receive minimal compensation from the PPF, even if it is properly funded.

But any employee in a final-salary pension scheme which has a large percentage deficit is at risk, and the downward spiral of higher levies for higher risk funds guarantees to make the situation worse.

The problem for employees and their advisers is how to get out of an underfunded occupational pension scheme with a transfer value which properly represents the cost of funding accrued benefits in a new Sipp or personal pension.

The clever ones saw which way the wind was blowing and got out with more than their fair share of the pension pot some time ago.

As the PPF levy on occupational pension funds increases, the situation can only get worse and, with the April 2006 cut-off date for ringfencing accrued pension benefits only 18 months away, there is no time to lose. For some employees, particularly those with accrued benefits already in excess of the 1.5m lifetime limit, it might prove to be a case of a bird in the hand is worth two in the bush and accepting a lower transfer value than they might be strictly entitled to, rather than a drastically reduced pension later on or even no pension at all.

This is the problem that pension consultants will have to face up to as soon as possible. But since most work for the employer rather than the employee, any high-earning employee with large accrued pension benefits at stake, would be well advised to take independent advice.

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