A PENSIONS lifeboat being set up by the Government will cost companies at least £600 million a year, double the estimate given by ministers, leading consultants said yesterday.

Deborah Cooper, a research actuary with Mercer Human Resource Consulting, said that the Department for Work and Pensions (DWP) had cut corners when it calculated the size of the levies companies would be required to pay into the Pension Protection Fund (PPF), due to come into effect in April 2005.

The PPF, designed to cover the pensions liabilities of companies that go bust with a deficit in their pension fund, will be funded by a levy on all companies with a final salary pension scheme.

Dr Cooper said: “To provide security for members of wound-up pension schemes, either employers will have to pay higher levies or taxpayers will need to foot the bill. Otherwise, the last few claimants on the PPF will receive severely reduced benefits and eventually none at all.”

Pension experts supported Dr Cooper’s calculations. Stephen Yeo, a partner at Watson Wyatt, the actuarial consultancy, said: “It’s easy to envisage circumstances in which the levy would be even larger than this. It’s very hard to estimate how many pension schemes out there are waiting to join the PPF.”

Ros Altmann, a pensions consultant, said that the calculations proved that the benefits to be offered by the PPF would be too generous and would result in more firms becoming insolvent.

The PPF offers much better benefits than workers would achieve if they agreed to a compromise deal, in which the company pension scheme is wound up with the injection of a final lump sum.

Such a deal may save their jobs by allowing the company to keep afloat but rob them of the PPF, which will pay pensioners 90 per cent of their promised pensions, capped at £25,000 a year.

“The Government is giving (pension) trustees an incentive to push companies into insolvency,” Dr Altman said.

A separate, £400 million financial assistance scheme for pensioners, also planned by the Government, was “pitifully inadequate, Dr Altmann added. The proposed Financial Asssitance Scheme (FAS) is aimed at supporting the estimated 65,000 people who lost their pension before the PPF was set up.

According to Dr Altman’s calculations, the FAS will pay out just £1 a day to each pensioner.

Dr Cooper calculated the size of the levy required for the PPF in the same way that insurance companies work out how much it would cost to buy annuities for every member of a company pension fund, taking into account solvency margins. She used Department of Trade data to make assumptions about the number of companies that fail each year.

“I think the DWP isn’t intending to run the fund like an insurance company would,” Dr Cooper said.

Experts fear that the PPF will be landed with a huge bill in its first year of operation, as companies hold off insolvency until the fund is up and running.

According to estimates by Maclay Murray & Spens, Scotland’s largest law firm, at least 250 companies are staving off bankruptcy until implementation of the PPF in April.

A DWP spokesman said: “We expect the annual cost of the PPF to be £300 million and there’s nothing we’ve seen in our research to make us change that view.

PERFECT BOND

THE Governor of the Bank of England has called on the Treasury to consider issuing “longevity bonds” as a way to tackle Britain’s pension crisis. Pension experts backed the proposal by Mervyn King (above), saying that longevity bonds would be the “perfect matching asset” to help companies to hedge their pension exposure in the face of rising life expectancy. The yields on longevity bonds vary according to benchmark measures of life expectancy for the population as a whole. In a lecture at the British Academy, Mr King called on the Government to play a greater role in sharing the risk posed by longer lifespans.

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