GLOBAL - Pension benefit protection schemes are calling for adequate funding to reduce the risk they take as underfunding and supervision are said to be emerging as major issues.

Speaking at the OECD (Organisation for Economic Co-operation and Development) seminar on ‘reforming pension benefit protection schemes' in Paris yesterday, Lawrence Churchill, chairman of the UK's Pension Protection Fund (PPF) - a young pension benefit protection scheme with only three years of existence - said:

"The three key aspects we have learnt from the US and Germany are to keep a respectable distance to politicians, to set a levy based on risk and to take steps to avoid moral hazard."

Andrew Young, directing actuary at the UK government actuary department, believes it is important to secure adequate fund, arguing: "Setting the benefits at an appropriate level - and providing less than a full scheme benefit - is fundamental. If you insured full benefits, it would be too expensive for the taxpayers."

He added the PPF's moral hazard consisted of three types, the pension scheme benefits being manipulated before entry into the PPF to maximise the level of compensation which increases the cost of claims, the increasing number of claims by employers dumping scheme liabilities on the PPF and the increasing cost of claims by employers organising their affairs so the pension scheme has a reduced claim on the employer in the event of insolvency.

John Ashcroft, head of strategy at the UK's Pensions Regulator, said to pre-empt moral hazard, the Pensions Regulator has established a clearance process, taken a hard line on abandonment and been trying to raise the trustees' game.

Young said addressing the moral hazard as well as creating as much freedom as possible for a pensions insurance fund, a flexible process for setting the levy, a strong scheme funding and not guaranteeing the full scheme benefits were important.

He added pension benefit protection schemes should also operate like a pension scheme to enable annual claims to be smoothed over time and avoid large changes between years in the levies on employers.