Pension protection fund slammed

GOVERNMENT plans for a pensions lifeboat were slammed today, hours ahead of publication of a new pensions Bill.

Pension experts said the proposed Pensions Protection Fund would add to the flood of employers abandoning guaranteed pensions and could encourage funds to invest imprudently.

Opposition to the PPF is likely to harden further as it emerged that the Government has dropped a key element in the Bill which would have ensured badly-run pension schemes were not cross-subsidised by good ones.

Plans for a risk-based levy - where funds with large deficits pay more than prudently-run funds - have been abandoned, according to Department for Work and Pensions documents.

Instead, funds will pay a flat-rate levy and the PPF board will be free to introduce a risk-based levy after a transitional period.

Paul McGlone, principal of Aon Consulting, said: 'This will send out all the wrong messages. It won't give employers any incentive to fund their schemes properly.'

The CBI and EEF employers' bodies both registered strong concerns about the expected policy shift. The U-turn appears to contradict a promise made in the Green Paper last year.

Employers are to be forced to chip in about £350m a year to bankroll the PPF, which will protect occupational pension fund members whose employers go bust. Since 1999 about 200 companies with such schemes have folded, leaving 60,000 workers facing shortfalls on pension promises.

The levy will add an estimated 1% to employers' annual pension costs. Aon warned that this would be enough to persuade some employers to close down their defined benefit or final-salary schemes. McGlone said: 'For some companies this will be the final straw.'

Dozens of employers have closed final-salary schemes to new entrants in favour of cheaper defined-contribution schemes, where employees shoulder the investment risks.

There are also concerns that the fund would be unable to cope if a major employer went bust in the early years. The average pensionfund shortfall in FTSE-100 companies is £600m and some of the biggest blue-chips have deficits of billions of pounds.

The Bill will also contain plans for a more-flexible regulator to replace OPRA. The DWP had no immediate comment.