Tanaka academic warns pensions fund won't be able to cope, Herald 7 May 2005

David McCarthy at Imperial College London's Tanaka Business School said the magnitude of claims will be so large that it will not be politically feasible or economically sensible to build up reserves to meet them.

Gordon Brown may have seen off the challenge from two "pensions protest" candidates in his Fife constituency, but pensions will continue to be a thorn in the flesh of the new Labour government. Commentators are warning that the UK is not going to reach current targets for pension savings, that the pension protection fund cannot offer security for future victims of collapsed schemes, and that the "financial assistance scheme" has left 70,000 existing victims in the dark about their protection.Only high earners are likely to meet the government's target of drawing 50% of retirement income from private savings in 20 years' time, according to the independent Pensions Policy Institute.

"New data suggests that contributions to private pensions are not as high as had been previously thought," says the institute in its first report on Shaping a Stable Pensions Solution. "Occupational pension provision is declining."

Labour's pension policy is to wait for the report of the Pensions Commission, chaired by Adair Turner. He may recommend the radical option of mandatory pension contributions, but the previous government sent out clear signals in recent months that any such move would require consensus and take a long time. The Pension Protection Fund, meanwhile, is set to occupy centre stage as it begins to process the first flood of claims on it, including one from the collapsed MG Rover scheme.

According to one leading academic, David McCarthy at Imperial College London's Tanaka Business School, the fund will hit "unstable" periods when it will not be able to cope. "The magnitude of claims will be so large that it will not be politically feasible or economically sensible to build up reserves to meet them."

In an article in this month's The Actuary magazine, Edinburgh-based consultant Ronnie Sloan warns that the £20m a year for 20 years promised for the Financial Assistance Scheme is "nowhere near enough to provide adequate compensation to all the 85,000 or so scheme members who have been so cruelly deprived of their pensions". Only 15,000 have been given assurances about levels of compensation.

Research published last week by brokers Bell Lawrie found 86% of Scots have "little or no confidence" in Labour's ability to solve the pension crisis. Asked whether the government had acted to protect workers' pensions, 54% of Scots said no. The study also found 74% of those surveyed had not increased their pension contributions following the government's announcement in 1997 to remove dividend tax relief for pension funds, increasing the likelihood of most savers facing an even larger pension shortfall.

These findings follow recent research by Watson Wyatt which revealed that an average with-profits personal pension may have lost nearly three quarters of its projected value since 1997, assuming funding levels have remained the same.

However, the last government did produce "pensions simplification", which comes into force on "A-Day" next April, and will make self-invested personal pensions (Sipps) even more attractive. The 10 million members of occupational schemes will then be able to take out a parallel Sipp, though only personal pensions, not company pensions, can be transferred into a Sipp.

Sipp investors will be able to invest in residential property, including buy-to-lets or even homes overseas, and borrow up to half of fund value to invest in them. They can also move into more esoteric investments. Steve Bee, head of pensions strategy at Scottish Life, said this week he expected new Sipp investors to use them "for either a villa abroad or a buy-to-let", adding that advisers would be able to offer "some pretty sexy pension products".