Not since the early years of the century has so much attention been paid to the solvency of our defined benefit pension schemes. The triple whammy of Tata Steel, BHS and Austin Reed’s schemes will potentially hit the Pension Protection Fund like asteroids pummelling the moon. Will these unwanted visitors just pock-mark the PPF or will their impact throw it off its access?
The pessimistic view!
The Pension Regulator reckons there is a total deficit of £322 bn deficits within our DB scheme. 17% of the 6000 schemes are basket cases which the Regulator doubt will ever become solvent. According to David Blake, who spoke in a gloomy way on MoneyBox, the PPF will have taken on £45bn of these deficits within the next five years.
The crucial period between now and 2025 and with only £20bn in assets, Professor Blake was doubtful, the PPF would make it intact.
The optimistic view!
Alan Higham, well know to this blog as our PensionChamp was more optimistic. He pointed to the PPF’s own assessment which reckons it has an 88% chance of making it to 2030 and being able to pay full pensions without recourse to the bail-out levies it is currently getting from other schemes.
Alan, who was himself the architect of the Financial Assistance Scheme that was the emergency measure the Government established before the PPF hit its stride, spells out the options on Moneybox
He points out that the current rules for paying pensioners would only be changed- as the nuclear option. Were the PPF not be able to cope, the first option would be to limit the increases in payment on PPF pensions and only when that wasn’t enough, would pensions be cut.
Why is there a problem and whose problem is it?
Both Higham and Blake were keen to distance themselves from Ian Hislop’s assertions on “Have I Got News for You”, that the tax-payer would be asked to bail out these pensioners. The tax-payer is not on the hook for these deficits , there is no “guarantee” in place.
There are three reasons for the deficits
- Too little has been contributed by employers and employees to fund these schemes
- The assets into which the money has invested , have not delivered the returns (and charges on the assets haven’t helped)
- Low interest rates have meant that guarantees on meeting liabilities have become increasingly expensive
A fourth reason, which may contribute to the problem in some cases, is poor management of the scheme, and poor oversite of that management.
This is a problem that sits with the pension schemes themselves, but since the launch of the Pension Protection Fund , the Pension Regulator has had powers to investigate companies who put paying the shareholders in front of paying.their pensioners.
So employers cannot shake off their pension responsibilities; and individual executives and shareholders such as Philip and Tina Green, may still be liable for some if not all of the deficit, even when the PPF has taken over the management of the assets and payment of the liabilities.
How can this be put right?
There isn’t space in this blog to look at the solutions. I will write later about two approaches which might work.
The first is to increase legislative power to increase the rights of pensioners and guarantee their payments.
The second is a more social solution, where society solves the problem by making the behaviours of those who avoid paying taxes in the regions where profits are earned, and take money out of companies which should be earmarked for pensioners- unacceptable.