Firms worried over pensions fund

The Pension Protection Fund is to stop pension schemes going bust

The Pension Protection Fund (PPF) has rejected suggestions that it is being unfair to international companies.

Set up this year by the government, the PPF aims to bail out insolvent pension schemes and charges them an annual levy based on the risk of funds going bust.

Nestle and T-Mobile claim their UK businesses will have to pay millions of pounds more than expected next year.

They argue that the PPF does not take into account the strength of their parent firms when calculating the levy.

"Can't afford that"

Confectionary company Nestle has warned it may have to move production from its factory in York to a location abroad because it thinks its levy this year will now be £12m - not the £300,000 it was expecting.

Mobile phone firm T-Mobile - owned by Deutsche Telekom - also said it expected to face a much bigger demand from the PPF.

Its managing director in the UK, Brian McBride, said: "The PPF, which last year asked me for £100,000, which was not unreasonable, is asking this year for £6m or £7m."

"I can't afford that and it's easier for companies to close these schemes and put employees on defined contribution (schemes)" he added."

However, a spokesman for the PPF denied this would be the case and said that no company could yet know how much its levy would be for the next financial year.

Number crunching

The levies that firms are paying in the first year of operation - 2005/06 - are based on a flat rate and are expected to bring in around £150m.

There are some unusual wrinkles especially affecting international companies Stephen Yeo, Watson Wyatt

But next year the PPF levy will raise much more - at least £300m is forecast - and will not be based simply on the size of the fund.

From then on, an individual pension scheme's payment will be "risk based", meaning that the levy would increase substantially if the fund was perceived to be at risk from the employer going bust.

The new fee would be calculated by multiplying the size of any deficit in the fund by the probability that the company that runs the scheme would go under in the next year.

Thus a company that is thought very likely to go bust could find its PPF levy is a 100 times greater than if the company was completely solvent.

International firms

According to Stephen Yeo of the actuaries Watson Wyatt, the situation is made more awkward for firms that are part of larger international groups:

"There are some unusual wrinkles especially affecting international companies", he said.

"The scoring system doesn't take account of the financial strength of an overseas parent (even) where that overseas parent company has guaranteed the safety of the UK subsidiary."

However a spokesman for the PPF said this would not be the case.

He pointed out that guidance published by the PPF on October 14th made it clear that the risk levy would be adjusted.

This would therefore take account of the support of an international parent company, or where a firm had already put in place a plan to make extra cash contributions to its pension scheme:

"We will be coming forward very shortly with proposals on how to include contingent assets, such as parental guarantees, in the 2006/07 risk based levy", the spokesman said.