When it comes to the loss of a pension after a lifetime’s work it is hard to express the pain in figures. An estimated 65,000 workers have seen their retirement plans sunk by pension scheme wind-ups since 1997 but the cost is probably better expressed in human terms.
According to Derek Wyatt, Labour MP for Sittingbourne and Sheppey ‘many people have tried to commit suicide’ because of lost funds.
Against such a background, you might have thought the worst criticism that could be levelled at the government’s pension protection fund would be ‘about time’.
But far from receiving a warm welcome, the proposals have been under fire from politicians, the business community and business turnaround professionals.
The employer-funded PPF ‘safety net’ is supposed to make sure members of defined-benefit schemes that are holed beneath the waterline don’t lose out.
As from April next year, it will guarantee the lesser of 90% or £25,000 for scheme members not yet at pension age and frozen benefits for those who are.
But opponents characterise the PPF as an attack on the principle of limited liability. They say it will hamper informal company rescues and allege it will encourage pension fund trustees to deal the fatal blow to more companies.
The Society of Turnaround Professionals last week warned the Department of Work and Pensions that it risked scoring an own goal in its attempts to clamp down on potential abuse of the PPF.
Its concerns relate to so-called ‘moral hazard’ clauses in the pensions bill. These enable the government to beat directors with the stick of personal liability if they try to dump their liabilities on the PPF.
However, the STP fears that the spectre of being personally out of pocket will frighten off company doctors from stepping into the breach to rescue troubled companies, leaving many to go bust.
In a submission to the DwP it said: ‘There will be a greater likelihood of companies in crisis with defined-benefit pension scheme deficits entering insolvency procedures, causing calls on the PPF … in other words producing exactly the opposite effect of what the scheme is intended to achieve.’
The government’s line is that, as long as they are acting in good faith, turnaround professionals have nothing to fear: in other words ‘trust us’. The problem is – particularly in the context of pensions – ‘trust us’ just doesn’t wash any more.
As Kevin Brennan, Labour MP for Cardiff West, points out, the whole pension crisis arose because governments used the word ‘guaranteed’ in their literature, and ‘working, honest citizens’ made the ‘fateful’ error of trusting them.
The problem faced by turnaround professionals is a spin-off of that which is vexing company directors, into whose shoes they step during times of trouble.
The allegation is that the government has stuck a dagger into the heart of the principle that owners of a limited company cannot be made to meet the company’s debts where they exceed its assets.
According to David Willetts, the shadow work and pensions secretary, ‘they have abandoned the whole concept of a limited liability company in the cause of forcing companies to honour their deficits … this is going to have profound implications for company finance.’
The STP agrees. ‘The concept of limited liability, which has served the economic wellbeing of the UK perfectly well over an extended period of some 150 years, is being eroded by these new clauses … which could fundamentally distort the working of the markets,’ it says.
Even the National Association of Pension Funds is alarmed at the drafting of the moral hazard clauses, and has suggested it is already ‘blighting’ corporate activity and will put employers off creating defined benefit schemes in future.
PricewaterhouseCoopers has proposed a ‘green light’ system to overcome the problem, where companies and individuals could get clearance that proposed transactions would not fall foul of the moral hazard clauses. It even suggested UK business could ‘grind to a halt’ otherwise.
The sight of a firm like PwC calling for additional bureaucracy can probably be interpreted as a sign that the concerns are serious.
Another issue that has come to the surface is the impact the PPF will have on so-called Bradstock agreements. Condemned by trade unionists as a pensions loophole for companies, these compromise agreements allow businesses to avoid insolvency by persuading pension members to accept a reduction in their benefits.
The Tories fear that the PPF will create a ‘battle ground’ between pension fund trustees and management, with the former opting to push more companies over the brink by refusing to compromise their position, safe in the knowledge that the PPF will take care of fund members.
Despite these gripes, few want to be seen as attacking the idea of the PPF safety net in principle: after all, it looks unseemly to snipe at changes to the law aimed at protecting one of the UK’s most vulnerable groups.
But while many accept it is right that the balance should swing towards pensioners, it can only do so at the expense of others. Chiefly, employers face additional costs in the form of the PPF levy. The CBI is concerned those with well-funded schemes may effectively be forced to subsidise less conscientious ones.
Even companies prepared to bite the bullet with good grace will want to know others can’t abuse the proceeds of their sacrifice.
The government faces a difficult balancing act if it is to offer them the assurances they desire without simultaneously bringing down the wrath of others who feel threatened by the stick it plans to use for the job – and the stakes could hardly be higher.