Connected Research

Union policy research in the 21st century

PPF says schemes’ deficit not that bad after all

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The Pensions Protection Fund yesterday published its November update of its PPF7800 Index, containing figures for the net balance of assets and liabilities in the 7,400 or so defined benefit schemes within its purview up to the end of October.

The highlights of the figures are that schemes remain substantially in deficit and that the picture was worse than it was twelve months ago.

Much of the media comment (see, for instance, the BBC) has focused on a change to the methodology used by the PPF to calculate liabilities, based on new guidance on calculating scheme deficits on which it consulted back in the summer. Essentially, it has become cheaper for pension schemes to purchase pensions for members from insurance companies and the effect has been to remove some 7% from the value of scheme liabilities.

This has reduced schemes’ net deficit as calcuated by the Index to below £100bn – an improvement of over £50bn on the September figure of a deficit of £148.9bn (34%). If the new assumptions had not been introduced, and this month’s PPF Index had been calculated on the old basis, then net deficits would have increased by some £20bn (13%) as a result of stock market falls over the month and lower returns on government bonds used to calculate scheme liabilities.

The cynical view might be that the PPF is seeking to use statistics and changed assumptions to legislate the issue of deficits out of existence. It might, of course, have a good reason to do so: so as to ease potential pressures on its own funds at a point when it has only last week revealed what these are via its annual report (blogged about below). It’s important for all manner of reasons that the figures are accurate as they can be – but the PPF is doing itself no PR favours by appearing constantly to tinker with the assumptions on which it bases its calculations

Nevertheless, the huge reduction in the deficit does remind us that the scale of deficits that schemes face is volatile as well as being a movable feast: pensions are long-term investments, and need to be seen as such, but they are also subject to continual human intervention, either for good or for bad, but frequently with short-term considerations in mind. We need to remind ourselves of the costs to ordinary workers which flow from policies based on such short-termist interventions.

There was good news for the PPF yesterday since it won a High Court case preventing Ilford Imaging, a company that collapsed in 2004 with a scheme in deficit to the the of £45m, from using scheme assets to buy annuities to cover the shortfall between expected pensions for higher paid workers and the PPF’s pensions cap (of c. £28,000). This inevitably had the effect of reducing the level of the scheme’s assets going into the PPF, while leaving it with the same outgoings, and thus increasing the pressures on the Fund. Thoughtfully, the judge concerned, while ruling that this was not what parliament had intended, further commented that agreeing to Ilford Imaging’s proposal would have opened the PPF up to ‘numerous and ever more ingenious attempts to take advantage of the PPF … [putting the fund] under increasing and possibly fatal pressure.’

It’s the judicial attempt to block consultancy-inspired ‘creativity’ that I particularly like here.

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Written by Calvin

11/11/2009 at 2:26 pm

Posted in Pensions

Tagged with , ,

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