Pensions facing a domino effect

CHANCELLOR Gordon Brown promised at the Labour Party conference to end the 'injustice of workers who, when their company goes bust, lose not only their jobs but are cheated of their pensions'.

But as with many politicians, this passion does not tell the whole story.

The Labour government has increased the likelihood of workers losing their pensions by gradually weakening pension fund regulation.

This weakening is not accidental or unintentional - it has been done in the name of increasing investment in the UK economy to boost employment and growth.

Mr Brown believes pension regulation has stifled long-term investment in the UK and loosening it will encourage pension funds to invest in high-risk venture capital, leading to a strong and dynamic economy.

The Chancellor's talk of a dynamic UK economy is all very well, but what about member security?

If a company goes bust, pension scheme members can look only to the fund assets to pay their pensions. The law provides some protection to make sure these assets are enough.

The Minimum Funding Requirement (MFR), was introduced as part of the 1995 Pensions Act following the Maxwell scandal.

It requires companies to hold a minimum value of pension assets to meet pension liabilities and make cash contributions to meet a shortfall.

But the supposed safety net was too weak from the start, so much so that even if a fund had 100% MFR assets, employees were unlikely to receive their full pension entitlement on a wind-up.

Things have got worse. Since coming to office, the Labour government has gradually weakened the MFR - reducing the value of assets a scheme has to hold, extending the time to make good a deficit and making the testing less often.

The government has further plans to scrap the MFR altogether and replace it with a DIY approach to solvency.

Each scheme would set its own 'long-term, scheme-specific funding standard', with more disclosure to members. Details are still being agreed two years after it was announced.

Meanwhile, plenty of UK companies are going bust with pension deficits - most recently Appledore shipbuilders, which went into receivership during the Labour conference.

It is reported that its 550 employees stand to lose 60% to 80% of their expected pension. The total loss for all pension scheme members runs to several hundred million pounds. Mr Brown's solution to members being 'cheated' is to repeat the government's plan, originally announced in June, to introduce a Pension Protection Fund, (PPF) to guarantee the pension funds of insolvent employers. Details are sketchy so far.

A compulsory pension guarantee must be scrupulously fair, with strict and transparent solvency measures. A proper risk assessment and the obligation to make up shortfalls within set periods would be an MFR with real teeth.

But it might not go down very well with companies that have pension schemes.

The government is looking at the US model, the Pension Benefit Guaranty Corporation set up in 1974 to protect the pensions of 44m people.

This is in deficit, following several spectacular bankruptcies. In the US it is clear that the federal government takes the ultimate risk of companies defaulting.

The UK government has said it will not guarantee the PPF, so the risk of default is on the shoulders of those UK companies with final salary pension schemes. Losses are to be clawed back by a super-levy on all participants.

It would affect a big part of UK industry, with the strongest companies bearing the risk for the weakest. Such a cross-guarantee could lead to a domino effect, increasing the structural weakness of the economy.

Like it or not, solvency of many pension funds is poor, threatening the pensions of millions of people.

The government should be strengthening, not weakening the legal framework for company pensions. It should not be papering over cracks with an ill thought-out guarantee system.

John Ralfe is an independent pension consultant and was formerly head of corporate finance at Boots.