The Pension Protection Fund (PPF) had noble beginnings. Also known as the pensions lifeboat, it was designed as safety net of last resort for employees with defined benefit pensions whose companies become insolvent.
There are over 800 schemes in the PPF which has secured the retirement savings of 250,000 people since its launch around a decade ago. The fund has recently come under scrutiny as it is taking on BHS’ pension scheme, which is nursing a £571m deficit. MPs on the influential work and pensions and business, innovation and skills select committees are sufficiently concerned about BHS’ administration that they have launched inquiries, with the pension a hot topic.
The vast British Steel pension scheme could be next to join the lifeboat, as Tata Steel sells up in the UK. More firms are sure to follow: five out of six final salary schemes are in deficit. The total black hole stands at £300bn on a PPF basis.
PPF chief executive Alan Rubenstein told MPs yesterday that the fund, currently 115 per cent funded, can cope with the BHS and British Steel schemes. He admits it could be overwhelmed in theory, but only in the event of a wider financial crisis.
So the PPF lifeboat may come under pressure from taking on failed firms, but looks likely to list rather than sink. What is less clear is whether it is fairly funded or, indeed, is being abused.
The lifeboat is partly financed by a levy on other defined benefit schemes. According to Kate Smith, head of pensions at Aegon: “This balance is looking increasingly precarious as a diminishing number of schemes pay an ever-increasing levy as more schemes fall into the PPF.”
Yesterday, the work and pensions committee chair Frank Field called this mechanism a “moral hazard” where the “righteous” pay money in to bail out those that have failed.
The PPF is still a welcome backstop. We must not return to the dark days of the Maxwell raid on the Mirror Group’s pension scheme. But MPs are right to investigate. The PPF assessment process must be as robust as possible, with clear lines of communication with the Pensions Regulator.
The lifeboat cannot be used for a company’s de-risking or restructuring strategy.
The concern is that this is happening in some cases. If proved to be true by MPs, the practice must stop.