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The Actuary The magazine of the Institute & Faculty of Actuaries

From the gloomy world of pensions

Rover and the PPF

Two days after it formally came into existence, the new Pensions Protection Fund (PPF) seemed likely to face its first significant test with the threatened insolvency of car maker Rover. The press speculated that pension funding problems had been a factor in the breakdown of negotiations between Rover and a potential Chinese purchaser. At the time of writing, there has been no public comment by the PwC administrators on the potential implications of insolvency for workers.

The latest accounts for Rover showed a pension fund deficit of £68m, suggesting that on a buyout basis the deficit would be well in excess of £100m. Much the greater threat to the finances of the PPF, however, continues to be the potential insolvency of car parts maker Turner & Newall, with an estimated deficit approaching £1bn.

An ill wind

Higham Group’s PPF Preparation Service opportunistically offers administrative, project management, and actuarial assistance to trustees, guiding their pension schemes through the PPF assessment period. The Preparation Service includes project planning, data cleansing, benefit conversion to PPF levels, and PPF valuations. It also facilitates data storage whatever the outcome of the PPF assessment period and will handle activities once the assessment period ends – normally entry into the PPF or scheme wind-up outside the PPF.

Pensions to inhibit corporate activity?

Senior executives of major UK organisations cite pensions issues as one of the factors most influencing their M&A decision-making in the next six months. 56% ranked pensions issues as a concern, with 28% citing pensions as a ‘high’ or ‘major’ concern.

Marc Hommel, of PricewaterhouseCoopers, said: ‘Over two-thirds of FTSE 350 businesses expect an increase in UK M&A activity over the next six months, but 56% of these organisations are worried about the impact of pensions. We are seeing companies pulling out of deals, citing uncertainty around pensions issues. Yet there are solutions to the pension challenges, whether they are around pricing, using the clearance procedures available from the new Pensions Regulator, or working together with pension scheme trustees to arrive at mutually beneficial outcomes.’

Raised employer contributions?

The new Pensions Regulator – which has a responsibility to minimise the number of schemes claiming on the PPF – has released a draft code of practice on scheme funding, increasing pressure on employers to make substantial payments against their scheme deficits.

A separate requirement for companies to secure clearance from the regulator for major financial transactions will create a further drive to fund scheme deficits. The regulator will be under pressure from 6 April to demand increased scheme funding in deficit cases as a quid pro quo for transaction approval.Ironically, the greatest pressure from these new measures is likely to be felt by the most creditworthy employers.

Tim Keogh, worldwide partner at Mercer, said: ‘The funding code says schemes should be fully funded as soon as practicable, and requires trustees to assess when this should be. Many people think well-capitalised companies can use their financial strength to justify maintaining their pension deficits. Obviously the regulator thinks otherwise, no doubt with one eye on the risk of substantial PPF claims from corporate failures.’