The new Pension Protection Fund aimed at helping employees whose companies go under may push underfunded direct benefit schemes with weak employers over the edge and into insolvency, a Birmingham lawyer claims.
According to Glyn Ryland of Wragge & Co, the risk stems from the fact that the PPF has deliberately not set a cap on the levy each scheme will have to pay but instead proposes to cap the amount of the riskbased levy payable.
The consultation document example sets this risk based cap at three per cent of a scheme's protected liabilities.
"Schemes with less creditworthy sponsoring employers will be hit hardest," said Mr Ryland.
"It is possible that the levy in respect of these schemes may exceed the amount of annual employer contributions."
Established in April, the PPF provides extra protection for members of occupational pension schemes whose employers have become insolvent.
From April 2006, it will be funded by the pension protection levy and the administration levy on eligible schemes.
"The more financial strain put on a weak employer, the greater the risk that they may become insolvent.
"However, many companies are part of a corporate group so it is possible that another group company is financially much stronger than the scheme employer.
"One possible result of the proposed levy structure will be that weak companies look for financial support for themselves or the scheme.
"Care needs to be taken as to the financial support provided. The PPF seems unlikely to take parent guarantees into account (unless it is a Crown guarantee) when it assesses the insolvency risk of the employer.
"Of course, this position could change, but it may be preferable, based on our current understanding, for the parent to improve the funding position of the scheme itself." The PPF is aiming to move to the full risk-based levy by 2006 - rather than 2009, with changes to the relevant legislation planned and a consultation document setting out the PPF's proposals is expected in November.
"The PPF has made it very clear that the structure of the levy is not set in stone and will develop over time," Mr Ryland added.
The consultation document can be found at www. ppf. gov. uk and interested parties have until 4 October to respond.
Meanwhile, there have been warnings that changes to the occupational pensions regime may dissuade scheme members from serving as trustees. From April 6 next year, occupational pension schemes will have to comply with new member nominated trustee/director requirements.
These require schemes to have one third membernominated trustees (MNTs) with the ratio rising to 50 per cent by 2009.
According to Vivien Cockerill, pensions partner at Wragge & Co, the new requirements are simpler than the current regime but members may be reluctant to become MNTs.
"The Pensions Act 2004 was designed to simplify pensions legislation and MNTs is one of the few areas where this is actually the case," said Ms Cockerill.
"That said, trustees are being left to design procedures to comply with the new requirements with very little guidance as to what they should do other than to ensure that the arrangements are fair, transparent and proportionate.
" Trustees should take advice to ensure that their procedures are adequate.
"Schemes are becoming more mature and pensioners
will represent a greater proportion of the membership.
"But, I'd argue that a pensioner trustee will not be representative of the membership in any meaningful way.
"The Government wants member representation on trustee boards, but the question is whether or not members will be willing to serve.
"Pensions law is becoming more complicated and, despite the simplification of the MNT requirements, the demands which will be made on all trustees in terms of knowledge and understanding only seem to increase."