When the Pension Protection Fund was created there were many who warned of a
potential black-hole scenario. The fear was that if the UK headed towards some
kind of depression meltdown, the PPF lifeboat would be overburdened by all the
final salary schemes dumped in its lap by failed companies.
Moreover, the risk-based levy raised by the PPF from companies with final
salary pension plans would have to increase, making it more unaffordable and, in
turn, causing yet more schemes to tip into the PPF.
However, the analysis sounded a little too pessimistic for its own good, and
even those who put it forward probably did not really believe it. In reality, as
we head into the worst recession since the war, things are holding up rather
Companies are tipping their pension schemes into the PPF, of course, the
recent spectacular headline-grabbing instances being Lehmans in the UK,
Woolworths, Waterford Wedgwood and Canadian telecoms manufacturer Nortel’s
British operations. The latter scheme was reported by The Guardian to
have come with a £500m deficit.
At its last set of accounts, the PPF had total assets of £1.72bn, on top of
which some £3.80bn of assets from pension schemes that had applied to enter the
PPF, but which were undergoing an assessment period. Overall, the PPF reported a
deficit (net liabilities) of £517m as of 31 March last year.
But, so far, despite these major corporate failures and the deficit in the
PPF accounts, the Fund is doing very nicely, insists a spokesperson for the PPF.
He adds that a new chief executive, Alan Rubenstein, joins on 1 April from
Lehmans (having qualified as an actuary with the more prosaic Scottish Widows).
The Fund has £3bn of assets (excluding those pension schemes still being
appraised and not yet formally entered into the PPF) and it is currently paying
out no more than £4m in benefits each month.
That is a far cry from finding your coffers ringing empty. Moreover, the sp
okesperson says, there is, as yet, no wall of failed UK enterprises threatening
to topple their schemes into the fund.
“Do we expect more failures? Unfortunately yes, but there is a lag to these
things and we expect to see more applications to the PPF over the next 12 to 18
months,” the spokesperson says. Even so, the PPF has, at present, no doubts that
it will be able to hold to its promise of not making any changes to the levy for
three years (though we are now in year two of this three-year promise).
“The PPF is not like an insurance company. It can run with a deficit,” he
says. “It has stress-tested its capabilities and done extreme modelling
scenarios which show quite clearly that it is good to pay out on its existing
liabilities for the next 25 years at least with the assets it already has. We
have been designed to run through downturns and upturns alike and we are
comfortable with our ability to do so.
“People need to realise that we do not get hit with all our liabilities on
Deferred members might have 30 years or more to go to retirement before we
have to pay out benefits, so we have both time and flexibility on our side,”
the spokesperson says.
Of course, the PPF has the same funding challenges as the final salary
schemes it is rescuing. It’s just that it has the luxury of sitting outside the
regulatory regime that has created so many problems for pension schemes and
their sponsoring employers.
And while it takes a risk-based levy from pension schemes in return for
underwriting their deficits in the event that the employer isn’t able to, it is
not subject to the regime that governs insurance companies.
FDs will doubtless appreciate the wonderful irony that allows the PPF to
survive unscathed while the regulatory environment that governs their schemes
threatens to tip them, the scheme members and the company over the edge.
Be that as it may, The Pensions Regulator (TPR) is a lot less sanguine just now
than the PPF. It has twin duties: to see fair play for trustees and to protect
the PPF. Protecting the PPF means making sure companies do not get pushed into
failing if it is at all possible for them to continue.
When one sums up all the forces that can cause a company to fail, there is
only a relatively small subset of these forces that TPR is actually empowered to
do anything about. If a bank such as Lehmans were to fail from the sub-prime
crisis, then too bad, that’s life. The US government could have saved Lehmans if
it chose, but TPR certainly couldn’t.
Similarly, if the markets move out from under you, as they did with Nortel
and Waterford Wedgwood, then that, too, is life. The DB schemes sponsored by
these companies then legitimately fall into the PPF and there is nothing TPR can
do about it except to ensure that due process is followed.
But as June Mulroy, executive director of business delivery at TPR makes
clear, the regulator can and will act where trustees take what she calls “a
recklessly prudent” attitude with companies that are already in some
difficulty. The Pensions Regulator does not want to see companies pushed
needlessly into liquidation simply because the trustees have decided to protect
members’ benefits by trying to force the employer to make contributions that it
simply cannot afford.
“We are as tough on trustees as we are on company management,” Mulroy says.
“We would say to trustees who want to wind up companies, ‘Where does that get
anyone?’” Winding up might be the ultimate option, but it certainly should not
and must not be the opening gambit.
“We are there to protect members’ benefits and the PPF simultaneously, and
these two aims are broadly on the same trajectory,” Mulroy says. So what is good
for the continued health of the company is good for the members.
TPR has considerable discretion where a company is doing its best, but is
desperately strapped for cash and cannot keep up with a recovery plan to reduce
the deficit in the pension fund. In such situations, TPR is prepared to allow
the company to come up with a new repayment schedule that is more in keeping
with its current circumstances.
What TPR is not keen on is what used to be termed a pensions contribution
holiday. “In the main,” Mulroy points out, “the majority of scheme sponsors that
would make this kind of request are in a position where a big pensions holiday
is not going to solve anything. It would just put the problem off for another
day,” she says.
TPR is also not likely to allow wobbly companies to ‘back-end load’ their
catch-up plan. Under a back-end loading arrangement, an employer would pay very
little into the scheme for, say, eight years and would then envisage two years
of massive payments.
The Pensions Regulator, however, knows perfectly well that the most likely
outcome of this kind of arrangement would be eight years of almost no payments,
followed by an excuse that times were still impossibly tight in year nine. “We
are much happier with an employer that is prepared to offer some kind of
underpinning or guarantee that shows that the debt will be paid. Little and
often is much better than a big chunk of money promised nine years down the
road,” she says.
Steve Herbert, head of benefit strategy at Origen, argues that it is right
and proper that TPR should look for ways of easing the burden on struggling
companies. “The levy that employers have to pay [to the PPF] is risk-based, so
you have an increasing levy imposed on a company that has less and less money to
put towards its pension plan. That, in itself, creates problems,” he says. The
whole nature of a risk-based levy is that where companies are struggling, they
will be pushed harder to pay more for a plan they can’t afford anyway, Herbert
This somewhat counter-intuitive position goes with the terrain if you have a
risk-based levy: the only alternative is to make healthy schemes pay
disproportionately more to bail out poorer schemes an arrangement that
inevitably generates even more animosity and heat. “We all knew this would
happen and now it is happening and it is very annoying to the board of the
company concerned,” Herbert says. They could be paying a levy of £200,000 one
year and then, with the credit crunch causing the ground to wobble beneath their
feet, £350,000 the next, “because their position has become more dire”, he says.
Stewart Richie, formerly head of research at Aegon and now an independent
pensions consultant, says that anything that TPR can do to ease the burden of
worry on trustees who want to allow employers to slacken off their recovery plan
in troubled times, for the good of the business as a whole, will be very well
“Trustees are terrified that something will go wrong and members will turn
round to them and say, ‘Why on earth did you let the employer have a pensions
holiday? We could have got more out of them,’” he says. However, if TPR gives
approval to a trustee arrangement with an employer which gives the employer some
grace, that takes a tremendous burden off the trustees.
Again, however, as Mulroy makes clear, TPR is much more likely to be
sympathetic to this kind of arrangement if the employer has some way of
guaranteeing that the ground will be made up at a later date.