The authors would like to thank Mike Orszag of Watson Wyatt Partners, and participants at a seminar at the Hebrew University of Jerusalem, the 2004 Colloquium of Superannuation Researchers at the Centre for Pensions and Superannuation of the University of New South Wales, the Watson Wyatt/Imperial College Workshop on Pension Insurance, and the 2005 Pension Research Council Conference in Philadelphia, Pennsylvania. All errors and omissions remain the authors' own.
The Pension Protection Fund*
Article first published online: 20 JUN 2005
Volume 26, Issue 2, pages 139–167, June 2005
How to Cite
McCarthy, D. and Neuberger, A. (2005), The Pension Protection Fund. Fiscal Studies, 26: 139–167. doi: 10.1111/j.1475-5890.2005.00008.x
- Issue published online: 20 JUN 2005
- Article first published online: 20 JUN 2005
We develop a model of the Pension Protection Fund (PPF), a defined benefit pension guarantee system for the UK, based on an analogy between pension liabilities and corporate debt obligations. We show that the PPF is likely to face many years of low claims interspersed irregularly with periods of very large claims. There is a significant chance that these claims will be so large that the PPF will default on its liabilities, leaving the government with no option but to bail it out. The cause of this problem is the double impact of a fall in equity prices on the PPF: it makes sponsor firms more likely to default and it makes defaulted plans more likely to be underfunded. We use our model to derive a fair premium for PPF insurance under different circumstances, to estimate the extent of cross-subsidies in the PPF between strong and weak sponsors, and to show that risk-rated premiums are unlikely to have a substantial effect on either the size or the lumpiness of claims. We argue that for the PPF to operate effectively, it should be introduced in tandem with strong minimum funding requirements and a lower level of benefit guarantee than at present.