HL Deb 14 July 2003 vol 651 cc85-6WA
Lord Higgins

asked Her Majesty's Government:

Further to the Written Answer by the Baroness Hollis of Heigham on 24 June (WA 13)—

  1. (a) for what reason the cost of liabilities for the Pensions Protection Fund was taken as being less than the full insurance buy-out cost;
  2. (b) what was the ratio of the full buy-out cost to the MFR for the sample examined;
  3. (c) whether the benefits costed included a full allowance for pensions to increase in accordance with the normal rules of the scheme; and
  4. (d) whether any allowance was made for there to be a correlation between the size of a pension deficit and the probability of the insolvency of the sponsoring company. [HL3776]

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)

Full insurance buy out costs are based on the yields of government and corporate bonds, and reflect the full costs of the Financial Services Authority's solvency requirements, as well as incorporating profit margins for the insurance company concerned. Not all of these elements will be relevant for the proposed Pension Protection Fund (PPF). We propose that the PPF will take in the assets of eligible pension schemes as well as any necessary levy. We do not intend for the PPF to be constrained by a legislative requirement to invest solely in gilts and corporate bonds, and over the medium to longer term, corporate bonds and equities have generally provided higher returns than conventional and indexed-linked gilts.

The full buy-out costs were estimated by rating up MFR liabilities separately for pensioners, non-pensioners within 10 years of retirement age and others, and in aggregate were estimated to be 50 per cent higher than the liabilities measured on the MFR basis.

The benefits costed included increases to pensions consistent with those included in the MFR valuations, and therefore only allow for guaranteed increases.

Allowance was made for there to be a correlation between the size of the pension scheme and the probability of the insolvency of the sponsoring company, but no specific allowance was made for a correlation between the size of a pension deficit and the probability of employer insolvency.

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