Academics cast doubt on pension 'lifeboat'

David McCarthy, a lecturer at the Tanaka Business School at Imperial College, London, said the Government's Pension Protection Fund was not "politically feasible or economically sensible".

McCarthy said the PPF was likely to face "many years of low claims interspersed irregularly with periods of very large claims". He said that, because UK pension funds have invested about 60pc of their assets in the stock market, a vicious cycle had been created. "If [pension fund] defaults are high, then equities will be very low and so pension funds will be underfunded. So the PPF will be lumpy," he said.

In a paper written with Anthony Neuberger, he wrote: "We suggest the magnitude of the claims in unstable periods will be so large that it will not be politically feasible or economically sensible to build up reserves to meet them."

A similar situation occurred with the US Pension Benefit Guaranty Corporation, which had average claims of only $300m a year between 1980 and 1999, but which now has a $23.3billion deficit.

The paper, which will be published in June, continues: "When such a crisis does occur, it may well be impossible to meet claims by a steep increase in the levy on employers. It is hard to see any alternative to the Government's stepping in."

The attack comes after Standard & Poor's predicted the PPF would have liabilities of almost £900m a year, forcing it to raise its annual £300m levy on companies with final-salary pension schemes.

Business Telegraph, 20 April 2005