David Prosser's Outlook: No prizes for pension prudence

No wonder companies keep closing their final salary pension schemes. The premiums employers must pay into the Pension Protection Fund, set up to protect members of schemes run by companies that go bust, will be more than twice as high as the compensation scheme itself had suggested last November. And what will particularly aggrieve many finance directors is that they appear to have been victims of their own prudence.

The PPF raises money in a rather peculiar fashion. Some 20 per cent of its annual levy comes from fees charged to schemes on the basis of their size. The other 80 per cent is a risk-based levy, with premiums based on how well-funded a scheme is and the likelihood of its employer falling into insolvency. There is thus an incentive for employers to keep their schemes well funded – the carrot is a lower PPF levy.

Trouble is, the PPF works out how much money it needs each year before taking a detailed look at the assets and liabilities of individual schemes and their employers. Last November, it decided £675m was the magic figure for 2008-09, only to discover that employers had improved their schemes' funding positions so markedly that the risk-based levy formula would produce a substantial shortfall.

No matter. The PPF warned in November that it expected to have to scale up schemes' bills once it worked out the detail of the risk-based levy. At the time, it reckoned a factor of 1.6 was realistic, but yesterday announced the number required was 3.77.

To put this another way, employers with final salary pension schemes will now have to pay a risk-based levy – remember, this accounts for 80 per cent of the total PPF annual charge – that will be 2.36 times higher than the fee they were expecting only six months ago. All because they have funded their schemes more generously than the PPF had allowed for.

The PPF's justification for what appears to be an injustice is that while scheme funding has improved in the short term, it must protect against long-term risk. That may be, but many employers will feel cheated by this arrangement. Had they not improved scheme funding, their bills would have been even larger of course, but the huge fee increases they face hardly represent the juiciest of carrots.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18000 per annum: Recruitment Genius: A position has arisen within th...

Ashdown Group: Development Manager - Rickmansworth - £55k +15% bonus

£50000 - £63000 per annum + excellent benefits : Ashdown Group: IT Manager / D...

Recruitment Genius: Security Officer

£16500 per annum: Recruitment Genius: Applicants must hold a valid SIA Door Su...

Ashdown Group: Business Analyst - City, London

£50000 per annum: Ashdown Group: Business Analyst - Financial Services - The C...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss