Pension Lifeboat Fund 'Could Face Multibillion-Pound Hit'

By Lucia Osborne-Crowley
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Law360, London (August 28, 2020, 11:30 AM BST) -- Pension funds are likely to face a multibillion-pound hit in the wreckage of the COVID-19 outbreak, similar to the crisis the sector faced after the 2008 financial crash, a pensions consultancy has warned.

LCP said Thursday that its new report outlines a scenario in which the Pension Protection Fund, the statutory scheme that protects pensions if the fund that members pay into collapses, takes a £10 billion ($13 million) hit. The report also sketches out a crisis in which the fund loses £20 billion in value — and warns that even that could still be a low estimate.

But LCP, formerly Lane Clark & Peacock LLP, said that the lifeboat fund has some strategies for managing such a crisis, which would allow the fund to weather the worst of a crisis without needing to make across-the-board cuts.

"The PPF has provided valuable peace of mind for [defined benefit] pension scheme members for more than 15 years, and it is reassuring to see that this 'lifeboat' is relatively well placed to navigate the current choppy waters," LCP partner Jonathan Wolff said.

"The PPF has a range of levers it can pull to absorb increased cost pressures without having to resort to cutting benefits to members," Wolff added.

LCP said that the aftermath of the 2008 financial crisis shows that the important indicator of how hard the pensions lifeboat fund would be battered by an economic downturn is not the number of insolvencies but whether these insolvencies take place in sectors with large defined benefit deficits.

The worst outcome would be if companies in the industries that already tend to have large deficits go under as a result of the COVID-19 crisis. Hospitality, entertainment, manufacturing, aerospace and high street retail are vulnerable, LCP said.

 The consultancy said that the total hit could soar above £20 billion if several of these bigger companies faced insolvency in the wake of COVID-19.

Wolff warned that the industry "cannot be complacent" when it comes to such risks.

"Recent history has been a reminder that the crucial question is whether the insolvencies which we are likely to see in the coming years will hit firms which also have large [defined benefit] deficits," Wolff said. "There remains a risk that too many such insolvencies could put a serious strain on the system."

The PPF stepped in in July to help pensions companies struggling with the financial fall-out from the pandemic by allowing them to apply for a temporary stay on paying their levies.

Pension schemes must declare how they have been affected by the pandemic to gain a 90-day interest free grace period on levy payments, the fund said.

The lifeboat fund, which protects savers when companies sponsoring pension schemes go bust, is set to raise £620 million from its levies in the financial year from April 2020.

--Additional reporting by Martin Croucher. Editing by Ed Harris.

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