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The Actuary The magazine of the Institute & Faculty of Actuaries
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Fair deal?

At first glance Ian Boonin’s article appears to describe a thoroughly good thing. The government is keen to ensure that the pensions rights of workers are protected even when they transfer out of a state scheme as various activities are transferred out of the public sector. On closer reading, I was less confident that it worked.

The process appears to have two aims, to ensure individuals retain the same amount of pension rights following transfer and to ensure the security of benefits. The first aim seems to be comfortably met. It is a condition of the transfer that the new employer has an equivalent scheme and the comparability rules ensure no disadvantage on this score. The process described also seems to give the opportunity for reasonable security of benefits to be preserved as the assets transferred to the new scheme are based on funding levels corresponding to index-linked gilts.

This seems to give companies a great opportunity to make money. All they need to do is to invest the money into equities. If the equity market performs well, the company benefits from a reduced funding rate and effectively makes a profit from the fact that the government put in too much money on this basis. The company could also presumably be sufficiently careful in the promises given to the fund that it carries limited risk for any potential shortfall on wind-up. Hence, the benefit security is actually much less than in the public sector scheme but the price paid by the government is too high because it assumes full security.

Potentially this is a great opportunity to make money. It looks far more profitable than bidding for the underlying contract is likely to be! Seriously though, as a profession we need to ensure this is fully understood. It is central to our core work on pensions, and if we are to have ambitions in the wider field we should not allow assessments of PFI effectiveness to overlook such a major factor.