The Pension Protection Fund (PPF) is succeeding, it is companies that are failing, with current issues being exacerbated by changing demographics.
As the PPF, a statutory corporation established under the provisions of the Pensions Act 2004, takes over the management of the pension schemes of the debt-laden construction firm, Carillion, some commentators have criticised the pension lifeboat and questioned its financial strength.
The Pension Protection Fund (PPF) can certainly withstand the Carillion collapse, yet some of the commentaries have forced it to speak out about how to give confidence to members who might be affected by this high profile liquidation. A spokesman for the PPF says: “We can confirm that we have been notified of the liquidation. We know this news will raise serious concerns for all people involved. We want to reassure members of Carillion’s defined benefit pension schemes that their benefits are protected by the PPF.”
Although the reported Carillion scheme deficit of £580m seems huge, thanks to its far-sightedness the PPF has over a £6 billion surplus to take this hit if necessary. Members of the scheme can assume that the PPF and administrators will do everything possible together to make sure payments continue.
While there are reports that Carillion scheme members who are not as yet drawing their pension would see 10 per cent haircuts to their retirement income, the Pension Protection Fund itself is doing an outstanding job, despite the difficult and evolving circumstances.
Indeed, the PPF is succeeding in doing incredible work by providing vital protection and much-needed reassurance for consumers across the UK. It is the companies now relying on the PPF that are, clearly, failing.
Too many major companies for far too long have been focusing on short-term goals and profits, rather than taking a longer-term, sustainable and more holistic approach. This is, in part, causing the black hole in the so-called ‘gold-plated’ defined benefit pension funds.
The combined deficit of the FTSE 350 firms has now reached 70% of their profits. But it is not all down to firms. External factors have played an important role in the expansion of the funding gap.
These include that ultra-low interest rates, under the quantitative easing agenda, have pushed up the current value of future liabilities, but even the rally equity and bond markets couldn’t offset them. In addition, baby boomers, who are those most likely to have these so-called ‘gold-plated’ pensions, are into their “golden years”, ushering ever more schemes into the costly pay-out phase.
The reality is that the final salary pension promise was, in times gone by, easy to make, but it is harder to keep in today’s world. The PPF is doing essential work in safeguarding pensions in an increasingly challenging business environment.
Nigel Green is founder and CEO of deVere Group