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Last Updated: Friday, 16 December 2005, 15:26 GMT
Pension schemes face 575m bill
Pensioner with walking sticks
The pension problem has prompted protests across the UK
The UK's 8,000 final salary pension schemes will have to pay 575m next year to finance the Pension Protection Fund (PPF).

The PPF was set up this year to provide a financial safety net for people in pension schemes that go bust.

The levy is nearly twice the amount first estimated, because longer life expectancy has increased the deficits.

The PPF estimates the pension schemes it covers now have an overall deficit of 100bn.

Bigger deficits, bigger levies

Speaking to the BBC, the PPF's chairman Lawrence Churchill said: "People are living longer so the deficits have gone up. We have calculated that the cash shortfall in pension funds across the UK amounts to a 100bn."

The size of the levy will vary from scheme to scheme, depending on how big its deficit is, and how big the chance that the scheme will go bust.

Mr Churchill pointed out that the overall levy for 2006/07 - the first year in which it will vary according to risk - could have been much larger.

"We have had to balance the issues of security for pension scheme members and the costs to the levy payer, which is why we are proposing to collect only 575m in our first year."

However the levy, which will be paid by the pension schemes themselves, will be capped.

No scheme will pay a levy that is more than 0.5% of its liabilities and most will pay a lot less than this.

How the PPF works

The central idea behind the PPF is that the pension schemes most at risk of going bust and making a claim should pay most.

Protesting pensioners outside Labour's 2005 conference in Brighton.
The PPF aims to protect workers whose pension funds collapse

Should a pension scheme go bust, then the PPF guarantees, within certain limits, to pay out 100% of current pension payments and 90% of the pensions accrued by those who have not yet retired.

All final salary pension schemes - other than state schemes - will have to cover the cost of the PPF and as a result, pay an annual levy.

There have been complaints that the burden of paying the new levy will simply make things worse by widening pension scheme deficits.

So rather than plug the gap - as now required by the Pensions Regulator - an employer might declare themselves insolvent instead.

Mitigate your debt

The size of the pension deficit will be calculated on the basis that an insurance company takes control of a scheme's assets and is asked to guarantee that it could pay the accrued pension rights for all the scheme's members.

How much extra it might need to do that would define the size of the deficit.

Known as the "buy-out" cost, this is the most expensive way of calculating a deficit.

But the PPF has set out three ways in which schemes can reduce this.

They can:

  • Obtain a guarantee from a parent company that it will stand behind its subsidiary's pension scheme.
  • Obtain a letter of credit from a bank or insurance company stating that money will be available should the employer goes bust.
  • Obtain a pledge of the employer's assets, such as offices or factories, should the employer become insolvent.

If a scheme is in fact funded to more than 125% of its liabilities it won't have to pay a risk-based levy at all.

The PPF will recalculate the total risk-based levy each year.

For 2006/07 it admitted that it was not charging the true rate for the protection it offers.

But Partha Dasgupta, finance director of the PPF, denied that an even bigger levy was likely for the following financial year.

He said that if economic circumstances change favourably, or companies took action to reduce their pension fund deficits, then the outlook could change dramatically:

"If overall risk in the sytem comes down then the levy may come down too" he said.

Why some believe the levy should be paid

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