David Prosser: The pension fund dilemma

Outlook Protecting pension savers is crucial. The Robert Maxwell scandal first highlighted how lax regulation of occupational pension funds could see members being cheated. More recently, many thousands of people have lost out because their employers have gone under, leaving an underfunded pension scheme behind them.

It was precisely these dangers that prompted the creation of the Pensions Regulator and it is right that the watchdog should have the power to ensure savers are treated properly by the employers sponsoring their schemes. And yet, how well have staff at Reader's Digest UK been served by the regulator? Its US parent company had offered to pay £11m into the UK pension fund, to make a start on tackling its £125m deficit. But while Reader's Digest has convinced the Pension Protection Fund, the compensation scheme, to sign off on this plan, the Pensions Regulator has not been convinced.

As a result, more than 100 staff now face the possibility of losing their jobs, with the US choosing to pull the plug on its UK business, rather than making the regulator a better offer. Those employees who are members of the pension scheme were no doubt anxious for reassurance that their retirement benefits would be safeguarded, but it is difficult to imagine too many will be sending grateful telegrams to the regulator for taking such an uncompromising position.

It's not just their jobs that are under threat. If their pension scheme is eventually moved into the Pension Protection Fund, their retirement incomes will be capped at 90 per cent of their true value. Only current pensioners get 100 per cent protection.

The Pension Regulator may well be right in its view that Reader's Digest's pension proposals exposed scheme members – and the compensation fund – to too great a risk of default over the next few years. But one could see many employees voting to take this risk if the only alternative was the loss of their jobs.

A buyer may yet emerge while the business is in administration. And note that the Reader's Digest scheme has 1,600 members, most of whom are no longer employed by the company – they may have a different view to staff on how the pension fund's future should be safeguarded.

Nevertheless, the regulator's tough line will be controversial. Chairman David Norgrove said last year: "There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency." Yet this is exactly what seems to have happened here.

The Reader's Digest affair has worrying implications for much larger companies. Take British Airways, for example, which thinks alliances such as its merger with Iberia are its best hope of securing a viable future. The Spanish airline has the option of walking away from that deal should BA have to increase contributions to its pension scheme, which is in deficit. The British company has yet to get a sign-off from the Pension Regulator for an extension of the 10-year term within which deficits must usually be made good.

Or look at BT, where the regulator only last week expressed "substantial concerns" about the company's plans to make good a £9bn deficit over 17 years. It could yet scupper those proposals, throwing BT into disarray.

The regulator has a duty to be robust as it works to safeguard the interests of scheme members. It fought a long battle to win the right to appoint independent trustees at the increasing number of schemes being bought out by specialist financiers and it has not shied away from holding employers to account.

Mr Norgrove has, however, also pledged to be more flexible during the economic downturn, recognising the strained finances of many employers. This is a balancing act – it is during tough economic times that pension savers are most vulnerable to the collapse of a sponsoring employer – but there does not seem much point in driving companies out of business in the name of strong pension regulation.