Pensions lifeboat 'too small to stay afloat'
Rescue scheme will need top-up after election, warn experts
Patrick Collinson Thursday March 3, 2005 The Guardian
The government yesterday hailed a new era for pensions with the formal launch of the Pensions Protection Fund but was immediately accused of underfunding the interim £400m lifeboat set up to rescue members of pension schemes that have already collapsed.
The PPF, modelled on an American scheme, will safeguard the 10 million members of final-salary company schemes if their employer goes bust. It comes into effect on April 6. If companies are wound up after that date and there is a deficit in the pension scheme, the fund will guarantee 90% of a worker's previous pension entitlement, capped at £25,000 a year.
Alan Johnson, the secretary of state for work and pensions, said: "The PPF will end the scandal of people losing their pension when their company goes bust."
The fund will be paid for by a compulsory levy on final-salary schemes, which Mr Johnson said will be about £20 a head: "You'll be insuring your pension for the same price as the travel insurance for a fortnight's holiday."
Shadow pensions secretary David Willetts said: "Ministers say the PPF will guarantee people's pensions but the small print says payouts can be cut. The PPF is supposed to be an insurance scheme for the future, but companies whose funds are in good health will have to pick up the bill for those already in difficulty."
Ministers have also set up a £400m lifeboat to help those who have already lost their pensions, the Financial Assistance Scheme, but critics said it could sink before it can rescue the victims of failed schemes.
Last week the government told 15,000 members of at least 380 collapsed company schemes that the lifeboat fund will pay out about 80% of their expected pensions. The announcement only covered those within three years of retirement, and not 50,000 other members of collapsed schemes who are still waiting to hear if they will receive anything.
Yesterday Mr Johnson refused to give estimates of the cost of compensating the remaining 50,000 amid claims that the true cost could run into billions.
Independent pensions expert Ros Altmann said: "The £400m fund simply isn't enough. If the parliamentary ombudsman rules that the government has to compen sate people properly, we are talking about closer to £5bn.
"It is clear Alan Johnson wants to do the decent thing: he has forced through the the lifeboat scheme and the PPF, but hasn't been able to persuade the Treasury to fully fund the scheme. The £400m is the minimum the scheme can get away with at the moment and after the election it will have to be readdressed."
Meanwhile the prime minister yesterday gave his strongest hint that the government would abandon the state pension based on National Insurance contributions in favour of a "citizen's pension" based simply on residency in Britain.
Questioned by Liberal Democrat leader Charles Kennedy, Mr Blair said there was a case for establishing an automatic pension entitlement based on residency.