Safety net 'threatens company schemes'

A SCHEME to safeguard the pensions of staff whose firms go bust came under attack yesterday. The Pension Protection Fund, which goes into operation on 6 April, will guarantee almost all of the money workers pay into traditional pensions linked to final salary.

But experts warned that it will also deal companies a major financial blow and may force more firms to axe final salary schemes.

It will pay 100% of the pension entitlement of retired staff and 90% of those still working and paying into the scheme, up to a maximum pension of £25,000 a year. Industry experts, MPs and employers back the idea but believe the way the PPF has been set up could be dangerous.

Experts predict that additional costs placed on business by the fund could accelerate the decline of final salary pensions. And companies who have these pensions are unhappy that the fund is to be financed by a levy.

Between 7,000 and 9,000 schemes will initially have to pay a flat rate of £15 for every member at a total cost of £150m. This will double after one year and could continue rising.

From next year, the size of the levy will also be based on the risk of a firm going bust. It will take into account factors such as the company's financial strength and its pension fund deficit - the gap between its value and pension promises.

Those with the biggest problems or holes in their funds will pay more. Strong companies with well-run schemes will effectively be bailing out failing firms - particularly under the initial flat-rate levy.

It is also unclear when all schemes will be paying the risk-based levy because only some will pay it from 2006. Companies want the risk-based levy introduced immediately so well-funded schemes do not face the bigger burden.

Others worry about the risk-based levy because the burden will fall on those companies with huge deficits in their pension funds, such as BT, BA and BAE Systems.

Sumantra Prasad, policy adviser at the CBI, said: 'Employers are expected to bear the burden and this would add significantly to business costs. This will also add to the pressure on firms to close their defined benefit schemes.'

Many companies are also suspected of holding off collapse until the PPF opens, so that their pension liabilities are covered. These could include Allders, Courts and engineer Turner & Newall - and a series of collapses would crush the fund in its infancy.

The National Association of Pension Funds has written to Ministers expressing grave concerns about the potential for such a disaster. Terry Faulkner, NAPF chairman, said: 'It is right to have a safety net but the PPF is just too generous. It will make companies think twice about providing these benefits. And the levy may increase in future years.'

Many firms have already shut final salary schemes to new employees, largely because of concerns about big shortfalls, estimated at a total of £60bn. Critics add it could even make deficits bigger because cash that would go into a company scheme will be diverted to the PPF instead.