With '£1bn' bill on the way, business frets for whom the levy breaks

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The Independent Online

A few days after Lord Turner's commission opines, the Pension Protection Fund will say how much it needs to raise from UK business, and how it is going to go about it.

The PPF was set up in the 2004 Pensions Act as a safety net for occupational schemes. It is loosely based on the Pension Benefit Guarantee Corporation in the US, which exists to bail out the retirement funds of American companies that can't afford to pay for them. Unfortunately in the US, troubled businesses such as United Airlines and Kmart have used the PBGC as a dumping ground for their pensions liabilities, with the result that it has lurched from financial crisis to financial crisis.

Lawrence Churchill, the investment industry veteran chosen to chair the PPF, is keen to avoid the same problems from dogging the UK fund. Told by Alan Johnson, when he was Secretary of State for Work and Pensions, that he would need £300m from business in the first full year of the PPF's operation, Mr Churchill set about working out a mechanism for raising it.

His principle that companies should pay a proportion of their pension fund liabilities, adjusted for the financial strength of the business, is accepted by everyone as good in theory. The problem is that it is terribly hard to put into practice. And the PPF also has the problem that it will need far more than the £300m first estimated. In fact, some experts believe the bill this year should be around £1bn.

This will cause a massive headache for John Hutton, who only last month succeeded David Blunkett as the new Secretary of State. "It will be terribly embarrassing for the Government if the amount is materially more than £300m," says Martin Slack at actuaries Lane Clark & Peacock. "But then, if the Government caps what the PPF collects, that could be a big issue politically too."

Having agreed to bail out the pension scheme of Turner & Newall, the PPF is reviewing whether it will help out at the two schemes run by collapsed car maker MG Rover. "In its first year alone, the PPF has taken on £1bn of liabilities," says David Robins, a partner specialising in pensions at accountants Deloitte. "You'd expect a bit of catch-up in the early years, but if this is any- where near typical, £300m will be far from adequate."

Mr Churchill has indicated in private meetings that he will not be afraid to set the levy quite high. As a result, businesses can expect a big bill from the PPF - bigger than some might think is fair.

The PPF's way of assessing how much a company should pay has been to go to information group Dun & Bradstreet for its "failure score". This is a secret rating between 0 and 100 that assesses the potential for a company going bust - 100 being very sound, 0 being get your money out now. This is transformed, via some mindblowingly complex formulae, into a fraction of a firm's pension liabilities that would have to be paid each year to the PPF.

The trouble is that this only compounds problems for troubled firms. Stephen Yeo, at actuaries Watson Wyatt, says: "In six months, we will be reading about companies going out of business because they can't afford the PPF levy."

A director of a large UK company told The Independent on Sunday he had already had approaches from smaller rivals,wanting to be taken over because they feared the levy would wipe out their profits.

Perfectly solvent companies also face problems. Media groups have been told they cannot count the value of newspapers or TV franchises in the calculation of their financial strength, with the result that a group like Trinity Mirror could end up paying five times what it should. A mutual insurer was given a rating of 13 - indicating it was close to collapse - despite getting an AAA solvency rating from the Financial Services Authority. And Nestlé's UK arm is angry it could not include a parent company guarantee for its UK pension fund - its bill is likely to be 40 times what it had thought.

"The PPF implementation is so inept, it is going to increase the cost of employment, with the result that jobs will go abroad," says Sir Digby Jones, the director-general of the CBI.

The PPF says it is tinkering with its methodology to try to iron out the problems. But with its total bill due within days, we will soon learn whom the levy breaks.