UK - One potential consequence of a prolonged credit crisis is that the Pension Protection Fund (PPF) could be forced to cut the level of compensation paid to beneficiaries in order to survive, Barnett Waddingham has claimed.

Rod Marshall, partner at the actuarial firm, said the "way things are going" with insolvencies causing more schemes to fall under the PPF - 20 schemes entered the assessment period in MAy 2009 - the organisation will need more money to pay compensation at the full levels.

This was highlighted by Alan Rubenstein, chief executive of the PPF, in June when he warned that while the PPF levy would "remain stable" for 2010/11 it "will consider in the future raising the amount of levy we collect above the rate of inflation, if necessary, to meet our commitments". (See earlier IPE article: PPF levy remains stable, for now)

However, Marshall pointed out the PPF has the power to cut levels of compensation - for existing beneficiaries as well as future members - and while it may be a "last resort" it could be one consequence of the credit crunch.

"That would be a step the PPF and the government of the day will be reluctant to take but it will only be a matter of time. Not months but probably a handful of years," argued Marshall.

He stressed the hope is it would not come to that but warned: "Unless we come out of the credit crisis quickly I don't know how they will be able to raise the sums they need over the next few years without putting more pressure on companies."

Marshall added that while the PPF "will survive in the long-term" it is the medium-term where it might have to cut back compensation, as companies won't be able to afford the levels of the PPF levy.

"I hope I'm being pessimistic, but in my view one effect of the credit crisis is this will happen", he said. 

In response to the calls for the government to stand behind the PPF - should it get into financial trouble - Marcus Whitehead, also a partner at Barnett Waddingham, warned "the government can't guarantee everything".

He admitted the voting population likes the idea of guarantees "but the cost at the margin is an incredible expense" so the government and industry needs to educate people that guarantees "come with a price and so you need to find the acceptable level of risk".

The firm therefore believes there should be more flexibility in the pension system, and said allowing more development into risk-sharing schemes could be a "middle-ground" between the very expensive defined benefit (DB) schemes that are closing and the defined contribution (DC) schemes that could be wiped out with large increases in inflation.

Whitehead suggested the government could be at the forefront of pension scheme design by removing the current "well-intentioned" restrictions and regulations that have resulted in unforeseen consequences, such as making DB schemes "complicated, expensive and fiddly and now they're looking to do it to DC". 

He warned: "What's sickening is that the government can do it with the state pension, by raising the pension age, but not for the private sector. If we just removed all the restrictions we could let market forces dictate what should be done. That's when we would get middle ground schemes of risk-sharing and innovative designs."

One option, for example, could be to establish an independent board for measuring longevity that could set parameters for retirement ages for schemes, so companies have flexibility to reduce costs but members are able to trust the calculations and would be more likely to accept working longer.
 Whitehead added the problem is that through the regulations the government is trying to "influence decision-making but throttling free development. What government needs is to take a step back and give a green field site to the industry to develop the solution they need as different companies and schemes will have a different solution".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email