NETHERLANDS - A leading US pensions academic, drawing on experience of the Pension Benefit Guaranty Corp., has said the UK is making a “terrible mistake” with its new Pension Protection Fund.

The troubled PBGC is a reinsurance company run by the US government to protect defined benefit plan promises. Its liabilities have been put at between $300bn and $1trn.

“The Brits have decided to put in a guarantee scheme which I think is a terrible mistake because of the problems that come up when designing the insurance scheme,” said Professor Olivia Mitchell of the Wharton Business School.

Mitchell, who is also executive director of the Pension Research Council, was speaking at the official opening of Dutch pensions research institute Netspar at the University of Tilburg. Her comments come barely a week before the PPF begins operations.

She said that over time the US premium structure had been changed from a flat per capita charge only to a flat and variable one that is a function of the degree of the plan’s underfunding.

“The problem is that all it shows is how underfunded the plan is. It does not look at the asset mix, or at the match between the assets and the liabilities.” Nor does it look at the credit rating of the sponsor, she added.

“Every plan still has a moral hazard opportunity.” The situation encouraged sponsors to go for a high-risk asset strategy, she said.

She pointed out that people were just beginning to realise that the benefits are not fully insured. “They are only insured up to a cap of $46,000 per annum, but you only get that when you retire at age 65. If you retire 10 years earlier it is actuarially reduced, so airline pilots are getting $25,000 a year when they had expected $125,000.”

“There are some very unhappy retirees who thought their benefits were insured.”

“This year the Bush administration says it wants to do something about the PBGC problem,” she said. “They want to double the flat premium from $19, people accept this as necessary.”

But there was a contentious proposal to hike the variable premium, not just on the degree of underfunding but also on the strength of the sponsoring company.

“So if you have a junk, or lower-level credit rating, you will have to pay a much higher premium because the probability is much greater that the government will have to take over the plan.” This will be politically very sensitive, she said.

The government also wanted underfunded funds not to offer any new benefit accrual. “This is sensible, you need to make good on your old promises before you make new ones.”

The unions in the auto sector were very upset about this, she added. The stopping of lump-sum withdrawals was causing a lot of discussion “This should have been done a long time ago.”