Academic warns state may have to bail out new compensation fund

The Pensions Protection Fund will go bust in the event of another sharp equity market downturn, forcing the taxpayer to bail it out, according to the pensions expert, Anthony Neuberger.

Speaking at the NAPF conference in Manchester, Professor Neuberger, of Warwick Business School, who recently wrote a paper on the PPF, told delegates that experience from the US shows the new pensions lifeboat would be in dire straits if markets fell, leaving it no option but to call the Government's financial support. Such an event was almost inevitable during the life of the fund, he said.

The PPF, launched last month, is funded by a risk-based levy paid by all final salary pension schemes. Although its board reserves the right to raise the levy or cut compensation payouts if it falls into trouble, Professor Neuberger said in practice, neither of these options would be feasible.

The US equivalent of the PPF - the Pension Benefit Guaranty Corporation - is $12bn (£6.4bn) in deficit due to the poor performance of equity markets over the past few years, and is about to be landed with $6bn by United Airlines. Professor Neuberger said PBGC data showed that in a worst-case scenario, the PPF could experience a thirtyfold increase. He said such a scenario at some stage over the next 30 years was highly likely.

"Typically, every year in 30 would see [claims of] about six times the average," he said. "But there's a chance that instead of six times the average, it would be 30 times the average. I can't imagine the PPF would be able to cope."

He added that the PPF board would be unable to raise the levy for other members, as these would already be feeling the strain from a market downturn, and said that cutting benefits would be politically impossible.