Scottish Equitable's pensions expert Stewart Ritchie warns in his latest "Ritchie Papers" that the g...
Scottish Equitable's pensions expert Stewart Ritchie warns in his latest "Ritchie Papers" that the government's proposed Pension Protection Fund is unlikely to help defined benefit schemes.
The problem with the PPF is that as the number and size of claims covered by the fund increase then levies will have to go up to meet the spiraling costs.
That will encourage employers to hike contributions from scheme members because the alternative, winding up schemes, will not be an economic option under the government's plans to backdate regulations, Ritchie says.
These retrospective rules will require employers to "meet any shortfall between the scheme's assets on winding up and the costs of buying out with a life office 100% of the promised benefits."
Thus, one of the worst possible outcomes of the new rules will be to encourage employers to run "frozen schemes", with future accruals of benefits stopped.
Trustees too will be affected although the implications for investment strategy, calculations and payment of transfer values "are currently difficult to quantify", Ritchie says.
Trustees will have to ensure they have a watertight case if they do not go after an employer to cover "deficiency" on the grounds that such action could lead bankrupt the employer.
"Looked at from the point of view of a defined benefit employer, it is as if the employer now finds itself running a life office subsidiary, and one which in most cases is currently grossly insolvent by any standard which the Financial Services Authority would apply to 'official' life offices," Ritchie says.
"After all, the Government has just decided that the defined benefit is a guarantee payment for the member's entire lifetime as a pensioner.
"It gets worse - most defined benefit schemes are heavily invested in equities, which in the last three years have proved to be a very unreliable match for the pension liabilities.
"Then, of course, there is the prospect of levies which will surely rise as other defined benefit employers go bust. Some employers may even go bust because of the existence of the PPF.
"If defined benefit employers - and their shareholders - are not horrified by this, they clearly have not understood what has happened. Watch out for employer incentives to members to transfer out of the scheme."
What all of this means is that there is going to be a significant future need for specialist pensions advice from intermediaries among others, Ritchie adds.
"The Government continues to pretend that the state pension issue has been resolved in a satisfactory manner. It has not. Sooner or later it will undergo major change."
"So the need for specialist pensions advice is going to be very significant for as long ahead as we can see. This may take the form of advice to individuals, employers and trustees. There will be a lot of adapting to do, including switches from defined benefit to defined contribution and, where a defined benefit scheme continues in some form, investment control and expense control."
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