UK: Move for compulsory insurance for pensions

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UK: Move for compulsory insurance for pensions

By Norma Cohen and Krishna Guha, Financial Times

June 2, 2003

UK - Proposals for a compulsory insurance scheme for final salary pensions are being drawn up by a team of senior civil servants as pressure mounts on the government to provide a safety net for workers whose pension schemes do not have enough money to pay all promised benefits.

Representatives from the Department of Work and Pensions and the Government Actuary's Department, met executives of the US Pension Benefit Guaranty Corporation last month after concluding it offered the best template for protecting British employees. They also studied pension insurance and regulation schemes in Finland, Japan, Germany and the Netherlands.

With FTSE 100 companies alone having pension scheme deficits of £65bn last year, ministers have come under growing political pressure to ensure companies meet their pension promises.

The government hinted in a consultation document last December it might consider some form of insurance scheme, although it had previously rejected the idea as unworkable and unnecessary. On Monday, a senior official at the DWP said: "It all goes back to getting the balance right between protection and not putting burdens on business such that schemes close." The decision on insurance would be "central to everything that we do", he said.

There are signs that employers may be prepared to accept pensions insurance as a fair price to pay for easing workers' anxieties. At the annual conference of the National Association of Pension Funds earlier this year, Terry Faulkner, chairman, urged the creation of such a scheme.

It is understood that the civil servants will set measures to avoid some of the "moral hazards" of the US scheme, which in 2002 sustained its largest ever loss of $11.3bn (£6.9bn). It is expected they will suggest insuring no more than 90 per cent of each individual's pension - equivalent to the protection offered with other financial products. They are also likely to urge consideration of capping the maximum annual individual benefit at a relatively modest level.

The consultation is expected to suggest that a government-backed scheme would have to be compulsory - a voluntary arrangement would probably be shunned by well-funded pension schemes.

If, as has been suggested, the government scraps the minimum funding requirement - rules setting out how much each scheme must hold - then the most underfunded schemes would have to pay the highest insurance premiums. Companies would be encouraged to fund their schemes adequately to cut insurance costs.

Andrew Smith, work and pensions secretary, yesterday told the Institute of Actuaries: "It makes no sense to pile regulation on providers in a way that could deter them from offering pensions at all. We need to make sure regulation is well targeted on the big anxieties that people have about their pensions today."

The Conservatives have also investigated the US model. David Willetts, shadow work and pensions secretary, yesterday met Steven Kandarian, executive director of the PBGC in Washington. Mr Willetts said: "It is a very odd feature of the British system that we do not have any central pension insurance scheme."