Nearly 20 per cent of schemes that have entered into the Pension Protection Fund (PPF) are from failed Midlands firms.
This is an over-representation compared to the rest of the country, and is set to rise further because of the looming closures of car and manufacturing production plants, according to financial services firm Aon Consulting in Birmingham.
Pension schemes are eligible to enter the PPF, the government pension lifeboat, if the company attached to the scheme goes through a qualifying insolvency event and the assets held by the scheme are not sufficient to provide a minimum level of benefits promised.
Once a scheme enters the PPF, if the members are not yet of retirement age they will only receive a pension of up to 90 per cent of what they would normally be entitled to under the scheme.
And even this level could potentially reduce as more underfunded schemes require support.
Following an insolvency event, schemes take two years to enter the PPF on average. This process is known as the Assessment Period.
If the process is not managed efficiently it can take much longer. This means considerable uncertainty for members of such a scheme, and reduces their ability to plan effectively for their retirement.
Matthew Harvey, pensions consultant at Aon Consulting Birmingham, said: “Unfortunately Midlands firms are over represented amongst schemes currently in the PPF.
“This comes down to the large number of automotive and manufacturing firms in this area who have traditionally offered final salary pension schemes to their employees. I fear we will see the Midlands being an even larger source of schemes in the PPF in the future.”
At the end of March, the PPF announced the 100th scheme was admitted, meaning there are now more than 31,000 people who have their pensions protected by the PPF. In addition, there remain 290 schemes in the assessment period.
There have been fears local businesses could be facing a significant increase in the levy they pay to the PPF because of the increasing number of corporate failures.
Shortly before the 100th scheme was admitted into the PPF David Fripp, the head of pensions at KPMG in Birmingham, predicted things would get more expensive, saying: “The rapid increase in corporate failures is likely to lead to a strain on the Pension Protection Fund which will inevitably feed through to a rise in levies. In some cases businesses could see their levy payment substantially increase.
“Operating within any economic circumstances this would have been difficult to manage, but in the current climate, this could prove critical.”
Aon Consulting said there were three key ways scheme trustees could prepare themselves for the process ahead.
These were meeting tight deadlines and completing mandatory tasks; communication with members and sound financial management.
More and more businesses are struggling because of the recession. This week, analysis by PricewaterhouseCoopers found the downturn is continuing, with 614 West Midlands insolvencies in the first three months of 2009, compared with 542 in the previous quarter.
And the difficult position of some of the West Midlands’ largest manufacturers means the PPF would end up having to pay out enormous amounts in the case of a large-scale business collapsing.