In the UK plans for a pension protection fund have been announced, while regulators in Ireland and elsewhere are examining the issue, writes Norma Cohen

The UK has arrived, belatedly, at the point at which one of the key pillars of its old age provision - occupational pensions - are in need of a safety net.

Mr Andrew Smith, Secretary of State for Work and Pensions, has just announced plans for the UK's first Pensions Protection Fund, saying that it represents the beginning of a "rolling programme of reform" to the pension system.

"We shouldn't accept that just because a firm goes out of business that people who have saved all their working lives should get nothing," Mr Smith said, laying out the premise of the new regime.

Irish pension regulators, too, are examining the issue. "The possibility of a compensation scheme is being discussed in the context of deliberations on the long-term funding of schemes," said Ms Mary Hutch, the Pension Board information officer.

An expert group on long-term funding of pensions in Ireland was established earlier this year and will publish a consultation document later this year.

But, at the moment, there is little protection for people who are members of pension schemes if the firm goes bankrupt. The only protection available is for contributions paid by employees but not remitted by the employer to the pension fund. These may be claimed under the Protection of Employees (Employer Solvency) Act.

Making sure that occupational pension holders are not left high and dry is a premise that other countries have followed for many years - most notably in the US, where the Pension Benefit Guaranty Corporation (PBGC) was created by the landmark Erisa labour legislation in 1974.

In Europe, safety nets of one sort or another are in place - in Austria, Belgium, Denmark, Finland, Luxembourg, Germany and the Netherlands. Australia, Japan, Singapore and Canada also have some form of pension support.

"Most countries have appreciated that this is an issue," says Mr Tim Reay, international benefits actuary at Hewitt Bacon & Woodrow.

Broadly speaking, there are two schools of thought when it comes to providing pension security, Mr Reay says. One is where countries provide very close oversight of how schemes are financed and invested, but provide little or no safety net. This is the Dutch model. Alternatively, countries can have light supervision of funding and an insurance scheme. This is the German model.

Between these two models, there is a trade-off, pensions experts say. In a highly regulated environment, employers may find they need to adopt more conservative investment strategies and maintain higher levels of funding within their schemes. But, insurance costs are very low.

In the other model, employers need not finance pension schemes at all, but the price of insurance may be very high. "In the UK, people are used to a more hands-off culture," Mr Reay says of the model likely to be more acceptable to British employers.

That means that there is a price to pay for a pension safety net. "But you can't have it both ways," he says.

In modelling a UK pension insurance scheme, officials from the Department of Work and Pensions have looked most closely at the PBGC because the template of US pension provision is closest to that prevailing in the UK.

Mr David Harris, a senior consultant at Watson Wyatt Worldwide, says there are worrying flaws in the design of the PBGC, perhaps the greatest of which is that consumers misunderstand exactly what is protected. "Consumers think it covers all schemes," he notes. "In fact, it only covers defined-benefit schemes."

With defined contribution schemes now providing pension provision for over half of US workers, a declining percentage of the population has a pension safety net.

Mr Harris notes that in many countries, governments have struggled to get the balance right between setting tough financing rules for employers, which might have the perverse effect of making private pension provision too costly, and setting lax financing rules that make it easy to walk away from obligations, leaving others to pick up the tab.

In Australia, the government decided that an insurance scheme was a necessary companion to compulsory pension provision, established in 1994. However, rather than assess regular levies on pension schemes for an insurance fund, levies are only assessed when a scheme collapses with unfunded liabilities.

Mr Reay notes the stark contrast between the approach taken by Germany and that of the Netherlands.

In Germany, pensions are essentially unfunded; instead, employers make a balance sheet entry and receive a tax credit for it. But it does operate an insurance fund, the PSV, which covers accrued pension obligations of an insolvent employer and insures benefits up to €82,000.

Meanwhile, the Netherlands, with the highest per capita pension savings in the EU, has no compensation scheme. Instead, it has a very tough regulator.

Dutch pension funds invest more conservatively than their UK counterparts - a holding of 50 per cent of assets in equities is considered very high - but those that do invest in equities are required to over-fund their schemes. Roughly, schemes must be 120 per cent funded to hold half their assets in equities.

As the UK prepares to introduce a pension safety net, it is not clear that the US model should be the benchmark. Indeed, UK regulators are hinting that they may incorporate elements of the Dutch model to keep down the costs of the new scheme.