According to a story in the Glasgow-based The Herald, the Department of Work and Pensions is patterning its pension safety net after the Pension Benefit Guaranty Corporation (PBGC), the US private pension insurer. Scottish officials visited the PBGC in Washington last month to study how it worked, the newspaper said.
Pressure for Scottish government action has been mounting in the wake of cases where companies have shut down pensions leaving workers with severely reduced benefits. In the most extreme case, employees with 35 years service at Edinburgh-based engineer Blyth & Blyth were left with no pension. A successor Blyth & Blyth business was launched last week, minus pension liabilities.
Stewart Ritchie, pensions development director at Scottish Equitable, told The Herald: “The Pensions Benefits Guaranty Corporation has had to be prepared to get involved in corporate restructurings, where it appears that one of the objectives of the restructuring is to work an option against the PBGC. If a solvent company spins off a subsidiary which takes the pension scheme, while knowing full well that the subsidiary is going to go bust, the PBGC can seek to have the transaction unwound.”
Ritchie told the newspaper that setting up any insurance fund is “highly dangerous”, as it could not only encourage bad employers to default on obligations, but deter good ones from running occupational schemes if an insurance levy is seen as an unfair cost.
The concept of a safety net had been rejected by the industry as impractical until a recent rallying- cry from the National Association of Pension Funds. David Boyd, partner at Edinburgh pension consultancy Watson Wyatt, commented: “None of the problems or disadvantages have gone away, it is still very difficult to get a formula which is fair to all employers. You are penalizing well-funded and well-run schemes as well as the poorly managed, and it is difficult to see a way round it. You are almost creating an incentive for poorly-funded schemes to make claims, in the knowledge a safety net exists.”
Funded by insurance payments from covered companies as well as investment income, the PBGC steps in to continue pension benefits for ailing or bankrupt private companies in the US.