The new Pension Protection Fund must raise enough money from companies to avoid being swamped by calls for aid as it may not have a second chance to get its finances right, a leading pension expert has warned.
The PPF, set up in April this year to guard final-salary pension benefits if a firm goes bust, needs to be realistic about its likely losses, John Ralfe, independent consultant, said in a note for RBC Capital Markets.
The fund - which is likely to have to deal with the fallout from MG Rover among others - aims to apply a risk-adjusted levy on firms with finalsalary, or defined benefit, pensions as soon as the 2006-07 financial year.
The fund already takes a fixed levy and is consulting the financial industry about its variable-levy proposals.
Mr Ralfe said the PPF must be allowed to charge a market rate for the risks it is facing as soon as possible.
" The PPF's ability to increase the overall levy does not give it a second chance to rewrite history. It must charge a proper market riskbased levy from day one."
Although the PPF can in theory put charges up, Mr Ralfe said there is a risk companies with strong credit ratings may find it cheaper to plug pension deficits with borrowed money rather than pay a higher levy. As a result, the bulk of PPF charges will fall on weak companies, he suggests.
An original £300 million Government estimate of the annual sum needed is likely to increase, but it is hard to make exact predictions, a spokesman for the PPF said.
"Because there is a lack of data out there, we are not in a position to know exactly what will be the total impact of the levy," he said.
The new Pension Regulator is gathering data from more 8,000 pension plans this summer to help the PPF estimate its levy for the 2006-07 financial year, he added.
A prominent figure in the UK pension industry, Mr Ralfe won headlines about three years ago when as then head of corporate finance of retailer Boots he shifted the firm's entire £2.3 billion pension pot into bonds.
Mr Ralfe has warned that the PPF may be overwhelmed by calls for help from firms with large pension deficits. The Government has ruled out underwriting the PPF with public funds.
Bob Scott, partner at actuaries and consultants Lane Clark & Peacock, said the firms most likely to fall into the PPF's arms were not among the top FTSE 100 listed firms.
"The FTSE 100 companies are probably going to be the least affected by the riskbased levy," said Mr Scott.
Nevertheless Government estimates appeared to be a serious under-estimate, Mr Ralfe said.
The scale of liabilities faced by the PPF puts it in the position of standing behind £134 billion of loans to British firms from their pension schemes, he said.
"In economic terms the PPF is guaranteeing £134 billion of long-term unsecured loans to the 5,000 UK companies with pension deficits. It should charge a market rate for its guarantees."
The PPF cannot retrospectively charge firms to make good shortfalls if it is hit by a flood of early claims, he said.
Meanwhile, David Blunkett yesterday said he hoped a reported £37 billion pensions shortfall for the UK's biggest companies would not trigger bankruptcies or withdrawals from pension schemes.
Speaking during a visit to Nottingham East Midlands Airport, the Work and Pensions Secretary said it came as no surprise that research had revealed such a massive deficit faced by the FTSE 100.