Companies may have to spend more to protect pension funds

THE pension schemes of many corporates could see their levy from the lifeboat fund rise, new research has warned.

Volatility in measures of the risk of corporate insolvency risk and uncertainty over the way levies are calculated in future means that pension funds and their parent firms may have to pay more to the Pension Protection Fund, according to Mercer. The pensions and human resources firm analysed nearly 300 companies, ranging from large PLCs to small subsidiaries, and found that 90 per cent of their failure scores – the measure of insolvency risk used by the PPF – had changed since the last measurement date of March 31. For companies with the highest score, meaning they have the lowest insolvency risk, a fall of one point could triple the cost of their levy.

Mercer said the volatility of Dun & Bradstreet scores – the credit information firm used by the PPF to create a failure score – as well as proposed changes to the fund for 2011-12, would redistribute the share of the levy from weak to stronger companies. The strongest companies could face a three-fold increase in the risk-based element of the levy, it said, although the PPF disputed this.

Hide Ad
Hide Ad

Deborah Cooper, head of Mercer's retirement resource group, said: "While the PPF is striving for stability around levy bills, the economic downturn and uncertainty around the extent of any recovery have caused measures of pension scheme funding levels and corporate insolvency risk to experience unprecedented volatility.

"These two elements, combined with possible changes to the way future levies will be calculated, adds to uncertainty around the size of future levy payments. All companies could be caught out, but proportionately companies with stronger ratings are most exposed."

Morrisons, construction firm Henry Boot, home shopping group Findel and Drax are among the Yorkshire firms which will have actuarial valuations of their pension fund this year.

British businesses are under pressure to fill the black holes in their pension funds, which have been hit by the financial crisis and former staff living longer.

Hide Ad
Hide Ad

A PPF spokesman said: "Our analysis suggests that adopting the new insolvency risk table, along with D&B's new failure score methodology will bring the predicted pattern of insolvencies 15 per cent closer to our experience to date. This new approach is more likely to be a fairer reflection of the risks to the PPF. While insolvency probabilities associated with each failure score will affect the proportion of the overall levy paid by each scheme, the effect to individual levies will depend on both the failure score as at March 31, 2010 and what the levy scaling factor will be. So, a threefold increase in insolvency probability doesn't mean a threefold increase

in levy."

Companies should speak to D&B to see if they can provide more information to affect the scores.