Government rules out taxpayers' money for pension bailouts

The Government yesterday ruled out using taxpayers' money to prop up pension funds of failed companies as it published a wide-ranging consultation into reform of the rules governing occupational pension plans.

The Government yesterday ruled out using taxpayers' money to prop up pension funds of failed companies as it published a wide-ranging consultation into reform of the rules governing occupational pension plans.

Alistair Darling, the Social Security Secretary, published an independent report outlining a range of options and called for the "widest possible debate". But he stopped short of outlining which proposals he favoured. "Getting it right, based on as wide a consensus as we can, is more important than rushing into legislation," he said.

There are 13 million pensioners or working members of company schemes. Mr Darling said one in seven schemes failed to meet current rules on adequate funding.

The review is aimed at updating existing rules introduced in 1997 to protect workers from unscrupulous employers following the Maxwell scandal.

At the centre is the Minimum Funding Requirement (MFR) which aims to ensure a company that goes bust can honour its commitments.

Yesterday's proposals include encouraging fund managers to invest more heavily in corporate bonds and setting up a central fund to bail out failed schemes.

The pensions industry welcomed a commitment to reform this complex issue. The Confederation of British Industry said current rules "impose high costs on employers and distort pension fund investment strategies". The National Association of Pension Funds said the MFR needed an "early and dramatic overhaul".

But some experts were disappointed ministers had not come up with firm proposals. Charles Young, a consultant at pensions advisors Towers Perrin, said: "We have had a system for three years that is not working well, we knew consultations were going on and you would have thought someone would have come up with some conclusions.

"It smacks of a DSS that feels it is damned whichever way it turns - if it strengthens the test it will knock employers, if it weakens it, it will give less security to employees."

The independent report, from the Faculty and Institute of Actuaries, outlined a host of radical reforms and three interim measures to correct flaws in the MFR. Abolition of MFR has not been ruled out.

The main proposal was a revision of the measure used to calculate whether a fund had sufficient assets:

* For pensioners, a composite index of yields on gilts and corporate bonds would replace the current gilts-only measure;

* For non-pensioner members, an estimate of equity returns would be scrapped in favour of the composite index plus a 1 per cent premium for future equity returns;

* The 15-year timescale would be replaced with an index of a range of maturities.

Other possibilities included a new regulator, an insolvency insurance scheme, different approaches for large and small schemes and setting up a guarantor of last resort - called a central discontinuance fund.

Three interims measures are suggested. These are new assumptions that: people now live on average two years longer, future inflation may be lower than previously thought, and equity dividend yields are now lower. The cumulative effect would be to increase pension liabilities by around 5 per cent.