Actuaries warn against plans to adjust pension lifeboat levy

Regulators' proposals to require pension schemes that invest in more risky assets to contribute more to the industry lifeboat fund may prove unworkable and inappropriate, actuaries said yesterday.

Stephen Rees, a partner at Watson Wyatt, the UK's biggest actuarial adviser to final salary pension schemes, said: "It's not necessarily appropriate for regulators to take such a short-term view and the implementation of these proposals would be phenomenally difficult."

The warning follows an announcement by the Pensions Protection Fund, the lifeboat scheme that pays the pensions of members of final salary plans whose employers go bust, that it is considering adjustments to the way it calculates the levy it charges all defined benefit pension schemes.

The final salary pension scheme sector has gone from being £90bn in surplus just seven months ago to £90bn in deficit today, figures to be published on Monday by the PPF will show.

The regulator will use the figures to press home the case for charging higher premiums to schemes that hold riskier assets. "The swing represents massive volatility and there has to be some sort of attempt to price that," a spokesman for the fund said.

Under the current rules, the PPF is funded by a levy on the final salary pension scheme sector. Individual pension schemes pay different shares of this levy, calculated by the PPF on the basis of the number of members of the scheme and the financial strength of the employer underwriting it.

The PPF's spokesman said it seemed logical that schemes with more risky investment strategies would be more likely to get into trouble and to become a burden on the lifeboat fund. These schemes should therefore pay a larger share of the levy, it argued.

Research conducted for the PPF by KPMG, the accountancy firm, suggests only a handful of final salary pension schemes have implemented investment strategies designed to reduce the overall risk profiles of the assets they hold. The regulator said that under the current rules, such schemes were effectively subsidising the levies paid by schemes that have not hedged large investments in equities and other more risky asset classes.

However, Mr Rees said the PPF's proposals could force pension schemes to sell off their most risky assets, even though these investments had more potential for producing stronger returns in the longer term. He also warned that the PPF would find it hugely complicated to grade the risk profiles of different schemes. Mr Rees pointed out, for example, that some equities would actually be much less volatile than certain types of bond. "It's a complete turnaround from the PPF, which has ruled out this sort of levy in the past," he added.

The PPF plans to issue a consultation paper on its plans within the next month or so and said yesterday it would not make any changes to the current system before the 2010-11 financial year.