THE cost of the Government’s pensions lifeboat will soar above £300 million a year as new Pension Protection Fund (PPF) calculations also showed that corporate Britain faced total retirement liabilities of £1 trillion (£1,000 billion).

Yesterday the PPF disclosed the calculations behind the annual risk-based levy that companies with final salary pension schemes must pay to keep the lifeboat afloat. Some large companies face PPF bills of millions of pounds a year.

According to calculations by Francis Fernandes, head of actuarial at ABN Amro, BT, the telecoms giant, could be forced to pay as much as £21 million every year towards the fund’s survival.

Nigel Waterson, the Shadow Pensions Minister, attacked the charges: “Companies that are already hard pressed to balance their accounts must not be unduly penalised by such a levy.”

John Cridland, deputy director-general of the CBI, said that companies feared that the costs, already a significant burden, would escalate out of control, as had happened at the American version of the PPF, which has a deficit of $23 billion (£13 billion).

Lawrence Churchill, the chairman of the PPF, admitted that the 2006 levy would be “somewhat higher” than the £300 million annual cost promised by the Government because the Government had used economic and mortality assumptions from December 2003 that now were outdated.

Stephen Yeo, a partner at Watson Wyatt, the actuarial consultancy, said that that made a mockery of the Government’s claims that the Pensions Act, for which it had used the same assumptions, would be “cost neutral”.

The PPF’s calculations showed that it faced a maximum liability of £1 trillion and a deficit of £134 billion if all British companies with final salary schemes collapsed at once. That is billions higher than recent estimates.

The PPF opened on April 6 to pay pensions to workers who lost their retirement savings when their company went bust with a deficit in its final salary scheme.

This year companies paid a flat per-member levy. From April 6 next year companies will pay an 80 per cent risk-based levy based on their risk of insolvency and the size of their pension fund deficit. The remaining 20 per cent of the levy will continue to be based on the number of members in the scheme.

Yesterday’s announcement contained several key changes. From December next year companies must calculate their pensions liabilities on a “PPF basis” using the fund’s rules on benefit levels, asset allocation and mortality projections. Even companies with a surplus in their scheme must pay the fund 1 per cent of their total PPF-basis liability every year but no firm’s PPF levy will be larger than 3 per cent of its PPF liablities. To work out a company’s funding risk, its liabilities will be automatically increased by 5 per cent as a “prudent margin”.

A credit agency will be employed to work out the insolvency part of the risk-based levy. Companies will fall into one of ten risk bands, each based on a probability of insolvency.

HEAVY BURDEN

• Consultations on levy open from November 30 until Christmas
• Comes into effect on April 6 next year
• No individual payment will be more than 3 per cent of the company’s PPF-basis liabilities
• Companies with a pensions surplus will be levied at 1 per cent of their PPF-basis liability
• A company’s risk of insolvency will be capped at 15 per cent
• The total levy is likely to be higher than the £300 million first announced by Government

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