Huge rise in pension bills hidden in the small print

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The Independent Online

British companies may have to pay two or three times as much into their pension schemes as a result of an obscure clause in the new Pensions Act.

British companies may have to pay two or three times as much into their pension schemes as a result of an obscure clause in the new Pensions Act.

The increased payments may have to start next April as the new Pensions Regulator ensures that the schemes are well enough off to avoid excessive claims on the new Pensions Protection Fund (PPF).

Already the FTSE 100 companies are paying £11.8bn a year into their pension schemes, which have an aggregate deficit of £60bn. The payments are likely to soar because of the new arrangements.

Under the Act, trustees of a pension scheme must agree with the company the level of contributions it must make, setting out a "statement of fund principles". However, if they do not agree, the case is referred to the Pensions Regulator.

Martin Slack, a partner of actuaries Lane Clark & Peacock, has spotted a potential conflict of interest that will mean any ruling by the regulator is likely to be tough on companies.

One of the other tasks of the Pensions Regulator is to minimise calls on the PPF. So it will insist on a level of funding that will avoid the PPF needing to step in if the company goes bust.

Under the old pensions law, companies only had to pay what was called a minimum funding requirement (MFR). Lane Clark has found, in cases it advises on, that the PPF payment is significantly more than the MFR - in some instances, up to three times as much.

However, it could be even worse. The Act refers in one part to the liabilities of an employer being calculated with reference to the cost of buying out the benefits through an insurance company. Only two companies offer this service, Prudential and Legal & General, and it is extremely expensive.

"The explicit reference to buyout costs in the Act means there is every likelihood that they will start driving funding levels," said Mr Slack.

In a real example, actuaries estimated that one scheme with £45m in the fund would have enough to cover the MFR, but to cover the PPF minimum would cost around £70m and to buy out the benefits £90m.

Many companies have already substantially increased how much they pay into their schemes. British Airways pays £225m a year, more than double the level of two years ago.

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