The news this week that the Department for Business etc (BEIS) intends to crack down on using pre-pack administration to avoid corporate pension liabilities is good.  Over the past ten years, directors of companies large and small have used, or abused, the legislation to close down their company and set up a successor or ‘phoenix’ company to take on its activities but crucially without the pension liabilities or debts.


Somebody has to pay, of course, and the normal course of action is for the Pension Protection Fund to take over the pension liabilities.  According to a report this week, 17% of the PPF’s clients are there through a process of pre-pack administration.  The pensioners concerned ‘pay’ through a reduced pension, but so do all pensioners because of the Pension Protection levy which is charged on all eligible DB schemes.    


Such behaviour by directors is reprehensible, of course, but the underlying problem is the inability of companies to finance their pension contributions - Carillion’s collapse earlier this year demonstrates an alternative and equally unattractive outcome.  


The real problem behind this is the huge increase in longevity over the past 30 years, vastly higher expectations for living standards and very low discount rates.  The rate of increase for the first two may well be slowing down but is unlikely to reverse significantly.  Discount rates could be raised but only if there is a break from the current methodology of using bond yields as their basis.  And there are too many large firms with their own agendas involved for that to happen quickly.


The focus at government level is all about finding ways to increase contributions and, indeed, the Centre for Political Studies issued a paper this week with sensible suggestions to do this.  But isn’t it missing the other half of the argument – that, though it may be unpalatable, we may all need to adjust our expectations for our retirement?  Company directors’ unedifying behaviour with pre-packs is a symptom of the problem, not the cause, and BEIS’s reaction simply a sticking-plaster.