I am struggling to understand this analysis of the potential bills facing corporates with DB schemes. It appears in the Sunday Times but I’m not sure it’s very helpful.
Here’s the article
Troubled companies face a threefold increase in bills for the lifeboat scheme for pensions — possible rises of £1m or more — in a “perfect storm” sparked by Covid-19, according to specialist adviser Lane Clark & Peacock (LCP).
The Pension Protection Fund (PPF), which steps in when companies are unable to fill holes in their funds, estimated in January that it would impose a levy on the sponsors of defined benefit schemes of £620m for 2020-21. But Alex Waite, a partner at LCP, said contributions were likely to rise as firms’ financial positions weakened in the face of the Covid-19 crisis, at the same time that pension funds were hit by a plunge in stock markets and interest rates were cut.
“The PPF is strong enough to withstand the present crisis but it is likely to need to raise more in levies, with some firms facing particularly large increases,” said Waite. “A rise in corporate insolvencies will put pressure on PPF levies across the board.”
Some companies face far bigger rises if their deficits have increased as their own so-called insolvency risk also rose. Describing this as a “perfect storm”, Waite said it “could eventually see £1m levy increases for some employers”.
LCP’s calculations include an assessment of 4,000 firms graded on their financial risk into ten bands — 1 being lowest risk, 10 the highest.
A firm in band four before the crisis could “realistically” be in band seven at the next assessment, LCP said. The PPF levy for band seven is more than three times higher than that for band four.
The PPF said it was keeping the situation under review.
Here’s my common sense response
The post pandemic world will be a poorer place, companies won’t have the same money and the financial risks analysed by the PPF will mean that almost all companies will be downgraded.
Does this mean that the PPF will suddenly be getting a 300% increase in revenues? I don’t think so.
I suspect that PPF will consider the employer’s capacity to pay. Just as tPR are re-considering the capacity of employers to meet their contribution schedules, so the PPF will reconsider the capacity of employers to meet their levies.
The FT are estimating that up to £1bn in pension contributions could be suspended this year as businesses strike deals with retirement scheme trustees to keep afloat during the Covid-19 crisis.
What should government be prioritising, scheme solvency or levies to protect its lifeboat? Self-evidently the priority must be to ensure schemes remain solvent so they don’t become a burden on the PPF.
And what would be the consequence if some of these under-funded schemes fell into the PPF?
Well I imagine that the PPF will move from the very healthy financial situation it was in prior to the onset of the pandemic, to a less healthy situation in the years to come.
This is entirely consistent to the problems facing Britain as a whole. Pension funding cannot be immunised from the problems of Britain as a whole and like the rest of Britain, the PPF will find a way to adjust.
This will not mean applying a business as usual methodology for collecting levies when quite obviously this is not business as usual. I’m quite sure that LCP will prove itself useful to its clients by helping them reduce the perceived risk of their covenant failing. But that can be achieved without sensationalist headlines that create general anxiety
LCP is one of our best pension consultancies but they should know better. Instead of scaring its clients and the general public with this talk of “perfect storms” , it should be looking to solutions that suit a new impoverished world. I like LCP but I didn’t like this article which looks like a bid to grab headlines that frighten the public and defy common sense.
It looks like the PPF agrees with me
We'd like to reassure our levy payers that COVID-19 will have a minimal impact on the amount of levy we expect to charge this autumn. Review our latest levy update here.https://t.co/PKKxH7FVfp
— Pension Protection Fund (@PPF) April 28, 2020