Pension Protection Fund cap increasing

hyubh

"... under rules unveiled on Tuesday by Steve Webb, the pensions minister, the cap is to be lifted by 3 per cent for each year of service over 20 years. This means, for example, that an employee who had been a member of a pension scheme for 40 years and accrued £50,000 annually would see their compensation increase from £31,380.34 to £45,000"

http://www.ft.com/cms/s/0/106b36ac-dd8f-11e2-a756-00144feab7de.html
http://www.dailymail.co.uk/money/pensions/article-2348786/Workers-final-salary-pensions-gain-greater-protections-company-goes.html

I am experiencing the odd feeling of being in agreement with a kneejerk response from the CBI... What do others think? Apart from the thought that it would indeed be nice to accrue a final salary pension of £50K a year!

hugheskevi

The change will increase the compulsory levy on private sector employers with Defined Benefit schemes, and benefit those with pensions of in excess of £30,000.

This raises two questions:

1) Is it reasonable to incease the burden on employers?
2) If so, should the beneficiaries of the additional buren be the richest few percent of pensioners? (from memory, about 2-3% of pensioners are higher rate taxpayers, which someone with a private pension of £30,000 plus State Pension is very likely to be).

In addition to possibly losing their job, employees lose in 3 ways when their scheme enters the PPF:

1) They lose 10% of their accrued pension
2) They proably lose revaluation and indexation, frequently a loss of about 20% of total pension
3) If they are capped, they lose more pension

These losses apply to all members - there is no de minimis. As such, someone with a modest pension of say £7,000 after a long, low-paid career at a firm can lose around 30% of the value of that pension, once the lost revaluation and indexation is taken into account.

I would have thought any additional funding that may be available would be directed toward those members, rather than the highest pensioned.

There are also moral hazard arguments - the more benefits are protected, the less incentive senior management have to manage the pension scheme correctly and prevent large deficits building up. Senior employees at the company for over 20 years may well have been responsible for the situation whereby the company folded and there was a large pension deficit.

A decision I find rather odd, especially given the current economic conditions.

rpc

I'm not actually sure this will affect many at all - the 20 year service requirement will probably cut out a number of the high earners.

I would rather see the 90% or indexation increase with service and perhaps a much more modest increase in the PPF cap. In today's money, if my DB pension is worth £30k pa on retirement then I have waited too long to retire!

With private sector pensions about to be hit by the removal of contracting out (while the public sector pensions get this paid for by the govt) I think there will be enough problems ahead without increasing the PPF levy too.

hyubh

rpc wrote: »

With private sector pensions about to be hit by the removal of contracting out (while the public sector pensions get this paid for by the govt)

Change of subject, but from an employer's perspective that would get things almost backwards: in private sector DB schemes, current proposals are to allow the employer to pass the cost onto employees. This is explicitly not proposed for public sector schemes. If you take the LGPS as an example, there has been nothing about central government paying for local authorities' increased costs, let alone the increased costs for the private and third sector employers who participate in the scheme (contractors, housing associations, CABs, a few private schools, etc.).

jamesd

hugheskevi, a lower cap gives a large incentive for those with bigger pensions to transfer out of the pension as soon as there's any sign that it might be in trouble. That entirely rational action on their part then makes the situation for the pension scheme worse because the transfer out was at full value and any deficit is now a larger percentage of the remaining fund.

hugheskevi

CETV's can be adjusted to take account of underfunding (and Regulator guidance talks about strength of covenant and length of recovery plan being considered when trustees are reaching a decision about whether or not to reduce CETVs).

The value of a CETV is on a cautious basis even if it isn't reduced, and although it depends on many member factors (marriage, health status, age, etc) analysis I've seen suggests a member might typically expect to lose about 10% of the pension amount based on a transfer to DC and eventual annuitisation.

Also, some of those affected may no longer work at the company and hence have no particular knowledge of its financial situation.

So whilst a transfer would still be a rational action, it isn't an attractive action compared to the company continuing and the DB pension being paid in full.

rpc

hyubh wrote: »

Change of subject, but from an employer's perspective that would get things almost backwards: in private sector DB schemes, current proposals are to allow the employer to pass the cost onto employees. This is explicitly not proposed for public sector schemes. If you take the LGPS as an example, there has been nothing about central government paying for local authorities' increased costs, let alone the increased costs for the private and third sector employers who participate in the scheme (contractors, housing associations, CABs, a few private schools, etc.).

LGPS is a weird one because it actually is funded. The govt have stated that the cost of the change to contracting out will not be passed on in employee contributions. Maybe they are expected LGPS to foot the bill out of local govt budgets, but none of the other pension schemes have pots and so it is reasonable to assume that (one way or another) this will come from public money.

hyubh

rpc wrote: »

LGPS is a weird one because it actually is funded.

The 'weird one' is in fact the biggest one, and has been around nationally since the early 1920s...

Maybe they are expected LGPS to foot the bill out of local govt budgets,

I don't see how the LGPS has been thought about at all.

it is reasonable to assume that (one way or another) this will come from public money

So it's 'reasonable to assume' public money will be paying for the higher pension costs of Serco, Capita, Balfour Beatty and the rest...? Insult to injury, none of the extra costs will help the actual pension funds one iota - in fact, it may make the position of the funds worse, if it causes opt out rates to increase.