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UK default experience casts cloud over Pension Protection Fund, S&P study shows

Default trends among UK companies suggest that the UK Pension Protection Fund (PPF) could rapidly exhaust its resources in meeting claims from company pension schemes, according to a new study by Standard & Poor's, the ratings agency.

Under current proposals, the PPF - which has been established to compensate members of defined benefit pension schemes which are in deficit when their sponsors default - will be funded by a levy of £300 million ($567 million) a year from April 2006. However, Standard & Poor's analysis of historic default trends among UK companies shows that - even on relatively optimistic assumptions - annual claims on the PPF would substantially exceed £300 million. A full copy of the study is attached.

"If past experience is anything to go on, there is a real risk of the PPF accumulating a sizeable deficit of its own quite quickly," said Jim MacLachlan, director of European pension services at Standard & Poor's. "Although corporate default are currently at a low ebb, it is likely that the annual levy will have to increase significantly in the early years. That may pose its own problems, as schemes under the new regulatory regime have to simultaneously trim their own deficits and pay a higher contribution to the PPF.

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