The Confederation of British Industry has warned the government that the proposed pensions protection fund will accelerate the move away from defined benefit schemes, and is proposing that members contribute towards protection.
In a letter to Work and Pensions Minister Andrew Smith, the employers’ group expressed concerns that the proposed PPF would destabilise pension provision and undermine business commitment.
The government is proposing the establishment of a pensions protection insurance fund to which all defined-benefit schemes pay a premium, the size of which will vary according to funding status, which will pay-out in the event of insolvency. The CBI, however, estimates that the new levy would impose additional costs of at least £375m (E531m) each year on companies continuing to operate defined benefit schemes.
Says John Cridland, the CBI’s deputy director general: “There is widespread concern that responsible employers with well-funded pensions schemes will be forced to subsidise companies with less well-funded schemes. Nothing will be gained if companies reduce employee pension benefits to afford the government’s levy or if they close final salary schemes altogether.”
David Willets, pension spokesman for the opposition Conservative party agrees that the PPF could result in a contraction in pension provision: “The extra cost of the fund could be the final straw for some companies who are finding the cost of their scheme too heavy.”
The concern that companies with well-funded schemes will be subsidising those with less well-funded schemes has also been expressed by accountants and consultants, PricewaterhouseCoopers. While welcoming the decision to set up an insurer, PwC warns against “pension freeloaders”.
“Proper pricing of the levy is important because it is doubly virtuous; not only is it fair, it encourages sensible funding and investment. Bad pricing encourages the opposite,” says John Shuttleworth, actuarial partner at PwC. The fear is that trustees may decide to take greater risk if they are believe that the insurer will pick up the pieces if it goes wrong.
In order that employers do not take on the full burden, the CBI is proposing that members become involved in the financing of the PPF. Says Cridland: “As employees are the ultimate beneficiaries of pension schemes, it is surely not unreasonable to expect the to contribute to secure their futures.”
The Amicus trade union disagrees that employees should pay. Said a spokesman: “What we absolutely do not want is the burden of the prospect of poverty in old-age passed on to the individual.”