Churchillian protection for pensions

By Ian Pollock
BBC personal finance reporter

This autumn will finally see the first cheques paid out by the Pension Protection Fund.

Lawrence Churchill

The PPF opened for business a year ago.

On the face of it, that seems like slow progress.

But the Fund's chairman, Lawrence Churchill, believes things are going well: "We have got off to a very good start," he says.

By the end of this financial year, the PPF expects to have more than 60 schemes in its so-called "holding pen".

That means they are under assessment before a final decision is made to absorb their assets and take on responsibility for paying current and future pensions.

Most of them are small schemes, of small employers, and with small deficits.

A few well-known names such as Rover stand out in the list, which is updated each month on the PPF web site.

Some 25,000 current and potential pensioners are now under the PPF's umbrella.

But with applications coming in at a rate of more than one a week, their numbers are likely to grow fast.

"I wouldn't be at all surprised if we were a £10bn fund inside five years. That is merely a reflection on the rate of insolvencies and the question of how much of a deficit is crystallised on the insolvency of an employer," says Mr Churchill.

New regime

The PPF was created by the 2004 Pensions Act, alongside the new Pensions Regulator.

More than 60 schemes will soon be in assessment by the PPF

Their task is to provide a safety net for members of insolvent schemes, as well as to ensure employers put more money into their schemes to avoid shortfalls.

Some people see employers as the villains of the piece, neglecting their schemes and then claiming that the holes in their pension schemes have nothing to do with them.

It is not a view that Mr Churchill shares.

"Business is in no sense a villain," he says. "The reason deficits have increased has generally been through macro-economic and demographic factors. The largest is that we are actually living longer.

"Business has been doing a good job of recognising the increase in deficits and putting extra contributions in, something between £17bn and 20bn in extra deficit contributions," he emphasises.

Levies and surveillance

To top up its assets each year, the PPF will charge a levy on all other private sector final salary pension schemes.

We discovered that the amount of risk out there in the system was much, much higher than people had really appreciated Lawrence Churchill

The amount needed this coming financial year has been set at £575m. The principle is that those schemes most at risk of going bust, and making a call on the scheme, will also pay the most.

In essence, the levy is calculated by multiplying the risk of the scheme going bust by the size of its deficit.

But to gather the basic information, the PPF and the Pensions Regulator are carrying out surveillance on thousands of pension schemes.

"We have been busily monitoring the solvency of companies and pension schemes, gathering data from scheme returns," Mr Churchill says.

According to him, things aren't looking that good.

"In the last few years in the UK, deficits have gone up quite a lot. We discovered that the amount of risk out there in the system was much, much higher than people had really appreciated."

Risky business

Risk is Mr Churchill's favourite word.

Busy looking for risky schemes

Measuring it is what he and his 60 colleagues in their suite of offices in Croydon are all about.

"We are rather like a messenger, charged by the government to go out and measure the amount of risk and come back to tell people how much risk is out there," he says.

But the PPF has taken a potentially risky decision itself.

When it was being established, academics told it there was a risk of a catastrophic company failure roughly once every 10 years, which would multiply that year's call on the PPF by 25 times.

But the PPF decided not to build up reserves, as it would impose too big a burden on businesses.

"We took the view that we wouldn't pre-fund for those things, because the contingency is remote, but if it happens, we will face up to it then."

Despite this, he is not just waiting for disaster to strike.

"What we need to monitor is how many of the larger schemes are in distress and how far in advance we can discover this.

"All of the big failures that occurred in the US, you could actually spot about 3 years in advance, as the business slid down the credit ratings," he points out.

Even so, is he not afraid that a huge company and pension fund failure might bring the PPF down?

"No I don't think it would. The key thing is, what's the deficit. Very rarely if ever will there be a cash flow problem for a pension fund. So you do have time to build up the extra reserves," he replies.

Close co-operation

The PPF and its staff work very closely with their counterparts at the pensions regulator, both on policy matters and individual cases.

We can't pretend to be King Canute at the waves telling insolvencies not to occur Lawrence Churchill

Together they expect to gather a huge amount of previously uncollected data.

Mr Churchill wants to publish an annual analysis.

"What we would like to do is make a lot of that information available to the public as a public service. There are many people in the pensions industry who would be very interested to see exactly what the shape of the risk is."

Sadly for nosey parkers - such as financial journalists - the PPF will not be publishing lists of those schemes it thinks are most at risk of going bust.

But if the companies start revealing the size of their risk levies in their own annual reports and accounts, this should provide a fertile area for anyone interested in collecting the data themselves and publishing a league table.

Not King Canute

The one thing that the PPF is not intended to do is stop businesses going bust.

"In a capitalist system of competitive businesses, insolvencies are going to occur. Some companies are going to succeed, some will go down," says Mr Churchill.

"Nothing that we do is going to change that. We can't pretend to be King Canute at the waves telling insolvencies not to occur. "

That does not indicate indifference to the consequences, though.

The whole aim of the PPF and the Pensions Regulator is to avoid repeating the experience of the tens of thousands of people who saw their pensions disappear in the last 10 to 15 years when their employers went under.

And despite the publicity given to the theoretically huge deficits in pension schemes, Mr Churchill appears confident the situation will improve.

"What we can influence is whether, at that point of insolvency, there is a deficit in that pension fund or not."