pension schemes will have to pay equivalent of 1% of employee earnings to fund govt scheme
Solvent pension schemes will need to pay a sum equivalent to 1% of employee salaries to finance the Pensions Protection Fund (PPF) proposed by the Department of Work & Pensions (DWP) white paper.
While the costs would be much higher for insolvent schemes, Chris Erwin, investment principal at Aon Investment Consulting, believes these market estimates are reasonable and are in the same league as the recent increase in National Insurance contributions.
The insurance premium the DWP is asking for would be paid into the PPF, which will be run by a statutory body with the purpose of protecting members of defined benefit (DB) plans with unfunded liabilities when firms become insolvent.
Under the DWP proposals, the maximum pay-out will be capped by reference to pensionable salary, which may be limited to between £40,000 and £60,000.
The plan is for the PPF to pay members' entitlements up to a maximum of 100% of pensions in payment and 90% for active and deferred members. It is to be funded by a levy on all occupational pension plans comprising two elements, a flat per-member amount plus a risk-based premium that takes into account the funding status of the plan levied.
Erwin said that if the obligation on the insurance scheme became too great, the fund would have to pay pensions for relevant scheme members from a deficit situation.
Pension plans that are already in wind-up will not benefit from any of the protection offered by the PPF.
Aon does not expect the PPF to have much impact on stock or bond markets, predicting that investors will see it as just another minor additional potential cost among many others imposed on business.
In the case of corporate bond investors, Erwin pointed out the companies with large pension liabilities are already known and the issue is reflected in their credit rating. He argued: 'The demand excess over supply is now so great that fund managers are beginning to buy overseas bonds and hedge the currency and interest rate instead of buying pure sterling corporate bonds.
'The investment banks employ extremely well-paid people, who are bright and work very fast under pressure. They have done their work on the white paper.
'We have detected no signs of real concern in the investment banks, fund managers, with the exception of the successors to Dr Doom, or the investment practices of benefits consultancy companies, including ourselves.'
Aon does not believe schemes should look to alter their asset allocation in anticipation of the PPF.
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