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PPF 'discourages' DB schemes, argues lawyer

UK - Strong pension plan sponsors have issues with current regulations surrounding the Pension Protection Fund (PPF), an NAPF seminar has heard.

Speaking at a seminar hosted by the National Association on Pension Funds (NAPF) on the deregulatory review, Jane Kola, pensions solicitor at Wragge & Co, said companies providing a strong covenant for their pension schemes "do not understand why they should pay the expensive PPF levy".

She added it was also a "time problem" to provide all the data necessary for the calculation at the right date.

"This is discouraging defined benefit-style pension provision," she pointed out.

But John Ashcroft, head of strategy at the Pensions Regulator, countered her claims by suggesting the levy for strong pension plan sponsors was merely "peanuts".

Stephen Yeo, senior consultant at Watson Wyatt, blamed the decline of defined benefit schemes partly on the compulsory requirement to provide guaranteed pension increases in line with inflation.
 
"In effect, this is like a tax amounting to around £3bn (€4.3bn) a year," he argued.

He cited statistics suggesting the majority of members of defined contribution schemes opt against buying an income at retirement that increases in line with inflation "because the cost of providing pension increases exceeds their perceived value," he explained.

Yeo is convinced the same could also be true for members of defined benefit schemes.

"Forcing defined benefit schemes to provide pension increases requires them to use scarce resources to support benefits whose cost exceeds their value," said Yeo.

One solution to halt the decline of defined benefit schemes might be to facilitate the withdrawal of surpluses from pension schemes.

According to statistics presented by Julian Yermo, head of the private pensions unit in the OECD's Financial Affairs division, there are more open defined benefit schemes in countries where surplus withdrawal has been made easier.

However, Robin Ellison, head of strategic development, pensions at legal adviser Pinsent Masons, noted the increase of defined contribution scheme is not only down to regulation.

"To employers, defined contribution looks more like a commodity they can buy from an insurer - so it is not all down to regulation," he said.

Chris Lewin, former head of Unilever's UK pension plans, argues defined benefit schemes are actually cheaper.

"In defined contribution schemes towards retirement, all has to be invested in fixed income," he explained. "Investments in equities can be made only very early on in a member's portfolio."

This contrasts with defined benefit schemes as the pooling of assets avoids this problem and higher investment returns can be achieved, he added.

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