The Pension Protection Fund (PPF), known as the government’s ‘lifeboats scheme’ for company pensions, is reported to be at risk following a wave of company defaults. In the worst cases, the defaults could result in a 10% cut to pensioner incomes.
Currently, about 230,000 people rely on the PPF for their pension payouts. This number includes 11,000 former employees of Kodak. The company had a £1.5bn shortfall in its pension when it fell into the PPF in 2019. The PPF also pays out pensions to 27,000 members of the Carillion pension scheme, which had a shortfall of £800m.
Former pension minister in the coalition government, Steve Webb, stated that the company collapses, as a result of COVID-19, could mean that the scheme may end up using up its current surplus of around £6bn, and resort to “extreme measures”.
These measures could result in a significant increase in employer’s levies to compensate for pension payouts. Among many, these employer’s may also be facing the financial impacts of the COVID-19 outbreak, therefore the increase in levies could be detrimental to them.
After modelling two scenarios for potential PPF financial hits, Steven Webb, demonstrated that the PPF may be able to absorb a £10bn hit. The model suggested that the PPF could take a £20bn hit by raising the levies on companies. Webb also commented, “if several larger employers were all to face insolvency in the coming years, even the more serious £20bn hit could prove to be an under-estimate.” If this is the case, the “extreme measures” may involve cutting payouts to existing pensioners to 90% of their current level. Although this requires parliamentary approval, this may still be a possibility.
An example of companies already feeling the impact of the levy increase is the Norville Group in Gloucestershire. The company was forced into administration last month, partially blaming the sharp increase in levies payable to the PPF. MP Richard Graham, told reporters that “the PPF levy absorbed all Norville profits of the last few years, weakening their balance sheet and paving the way for a cash flow crisis.” In July, there were more than 130 jobs lost in Gloucester, Bolton, Seaham in Durham and Livingston in Scotland after the company went into administration.
The PPF does have several levers they can pull from to manage financial pressure before cutting the payouts to members. Nevertheless, Webb stresses that “there remains a risk that too many such insolvencies could put a serious strain on the system.”