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Monday, 21 September 2009

Pension Protection Fund hampering our recovery

by Peter Heginbotham, President of Greater Manchester Chamber

It is not unusual that a Government rescue package is actually funded by the innocent. That is certainly true of the Pension Protection Fund. This particular lifeboat is constructed with planks stolen from those ships still afloat in a choppy sea. And the less seaworthy a ship, the more planks are stolen from it. Not only that, a new lifeboat is needed every year.

The way it works is this. Companies that were decent enough to provide excellent pension schemes have been weighed down by the rapidly escalating cost caused by the triple whammy of reduced investment value, higher cost of annuities and the improved mortality rate. It’s clearly right that if one of these schemes goes bust there should be protection for workers who have contributed for many years and would otherwise completely lose their pensions. The question is how that protection is funded. On a flawed analogy with insurance, the PPF is founded on the concept that the surviving schemes should pay for this protection. The weaker the employer is financially, the more it has to pay thus increasing the risk that more schemes will go bust. The assessment of how weak or strong an employer may be is based on Dun and Bradstreet ratings which are opaque and of questionable accuracy. The levy fluctuates wildly from one year to another. One company paid about £750 one year, £20,000 the next and £44,000 the year after that. The basis of the financial assessment is not properly explained, so challenge is hard to maintain. And none of this applies to the equivalent schemes in the public sector which are similarly in deficit. That falls directly on all taxpayers.

The consequence of this misconceived scheme is that many businesses with final salary schemes are now working for their pension schemes rather than for their owners. Some companies that have been prudently managed and should be in a position to capitalise on the anticipated recovery are instead hampered by balance sheets weakened by levy payments, arcane calculations of pension liabilities stretching forward many years and the consequent difficulty in raising finance for expansion.

Greater Manchester Chamber has campaigned for reform for a while and the British Chambers of Commerce is now taking the matter up nationally. The insurance analogy is totally flawed. A more appropriate one is that this is a case of forcing the gravely wounded to give blood to the dead.

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