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UK's pension fund plan delayed.

Byline: (Staff Writer)

The UK's Pension Protection Fund said that it will delay by at least a year its plans to make the largest pension schemes provide a bigger share of the money it collects through levies. At the same time, it has said it could run a deficit for decades.

The PPF currently collects [pounds sterling]700 million ($1.1 billion) a year in levies from defined benefit pension schemes and has warned that this figure is likely to rise when the economy starts to recover. In November, it published proposals for changing the way that this burden is distributed between pension schemes, saying it intended the new rules to apply from 2011/12. These changes would have seen the share of the levy paid by the largest 100 pension schemes rise from 27 per cent to up to 31 per cent. The PPF has said its proposals need further work and will not be introduced until 2012/13 at the earliest.

John Ball, head of defined benefit pension consulting at Watson Wyatt, said, "It's good that the PPF has gone back to the drawing board. Taking a longer term view of the risks it faces is fine in principle but the devil is in the detail. For example, the PPF wanted to assume that if two companies have the same chance of going bust within one year, they must also have the same chance of going bust within five years, which clearly isn't right."

"It also wanted to begin with a pretty crude approach to measuring the riskiness of investment strategies which would not have given schemes credit for sophisticated risk reduction techniques. It's encouraging to see the PPF look at this again but it still wants large employers to take a lot of the strain when it comes to clearing the PPF's deficit and helping it build up a cushion for the future." <p>The recession could leave the PPF with a significant deficit. Depending on its eventual size, this could be repaid automatically because the PPF expects that, in normal years, it will collect more in levies than it needs to cover new claims. However, if the deficit is very large or if future economic conditions are worse than PPF modelling assumes, very sharp levy increases or cuts in compensation payments could be required. The PPF has said that, because it will be some time before it runs out of money, it can operate with a deficit for a long period, even decades.

Ball said, "The plan seems to be to hope for the best rather than take the really tough decisions any time soon. That's good news for older pensioners receiving compensation and for companies who will buy out their pension liabilities with an insurer because it won't be their problem if nothing turns up. If things go wrong, it will be the companies still paying levies in 20 or 30 years' time, or the people hoping to receive compensation then, who suffer the consequences."

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Publication:CPI Financial
Date:Aug 23, 2009
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