UK – Consulting firm Towers Perrin has warned that the UK’s new Pension Protection Fund could usher in a “new arena of conflict” between employers and scheme members.

The launch of the PPF would mean that the objectives of employers and pensioners would diverge, said consultant Michael Johnson.

He told a conference on Longevity risk and capital markets at the Cass Business School: “A new arena of conflict is going to emerge.”

“If a market for longevity does not develop the PPF will be overwhelmed,” he added.

He said that while longevity risk was important it was a “second order” problem. “There are plenty of parties keen to shed longevity risk but very few natural takers.”

And he said that longevity risk as an asset class “lacks homogeneity”.

He likened the current longevity crisis to the Latin American debt crisis of the late 1980s that was addressed by the then US Treasury Secretary Nicholas Brady – the father of the Brady Bond.

Johnson says that trustees, like the countries involved in the Latin American crisis, will have to cut deals with creditors.

He was critical of how the reality of defined benefit schemes was “obscured by timid legislation, legal ambiguity and poor actuarial communication”. He asked: “Are equity markets fully pricing in the risk?”

Since longevity primarily affects shareholders, Johnson suggested the solution lay in the equity, not fixed income, market.

There was scope for innovation as the concept became more familiar.

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