Grexit, pursued by a bear

A Greek exit would be as bad for the PPF as for the UK economy at large says Teresa Hunter

So we had all better pray that the Brussels oligarchy uncharacteristically manages to engage brain before too long, if a disaster is to be averted.

UK PLC is sitting on a £160bn pension deficit, and bedlam is the last thing we need.

From a pension perspective, the best outcome, wash my mouth out, probably lies with preserving the euro in its current form, moving towards greater federalisation, and the European Central Bank taking over regulation. This would at least stabilise the current crisis, bring order and light, and hopefully in time lead to growing confidence.

But even God has his limits when it comes to miracles, so I wouldn’t bank on a benign outcome.

More likely, Greece leaves or is Grexited, sending pension advisers to their knees calling for divine assistance, given that 40 per cent of our pension savings are invested in equities.

In fact, with a bit of rational thought, pensions could probably survive the Greek exit without His help. Greece is a relatively small economy, and although devastating for the Greek people, we might emerge with hardly more than a scratch. We don’t export much to the birthplace of democracy, and our banks will only take an indirect hit. After short-term jitters, markets could stabilise.

But this is Europe we are talking about, so don’t hold your breath for the Greek exit to be ordered or civilised. If the Greek situation turns ugly, markets will spin, with worrying implications for countries such as Spain, Portugal and Italy.

Spain is the fourth biggest economy in the EU and if it gets into serious trouble then all bets are off. Either Germany digs deep, or the Eurozone implodes. Prepare for a car crash.

Spain is the fourth-biggest economy in the EU and if it gets into serious trouble then all bets are off. Either Germany digs deep, or the Eurozone implodes.

Prepare for a car crash. The UK economy will be back in recession and managing any kind of pension or investment portfolio will take all the heroicnerve and steel of a fighter pilot. And many won’t land safely. The Pension Protection Fund will see more funds clamouring to enter, and there has to come a point where it too starts to look holed.

We have already seen rising numbers of company collapses, and pre-pack insolvencies, where firms go bust but have a new owner standing in the wings.

If we reach the point where exports dry up along with corporate profits, and markets are in a nose-dive, there will be a very long line of toxic pension funds knocking at the PPF’s door.

More still will be clamouring for the kind of “agreed” defaults, we have recently seen where the Regulator reaches a deal with an employer that the fund can go into the PPF along with an additional payment. This may not cover the pension funds liabilities, but the PPF gets more than if the company traded on and then crashed, leaving nothing. It also protects jobs.

As the economic crisis deepens, there will be a limit to how much of this blackmail the regulator can give in to, not least because of the burden it places on other levy payers. The pensions debts of firms in default are paid for by other companies. In a worst case scenario there may not be enough of these left to shoulder the burden.

The PPF says it has every eventuality under its gaze, and has modelled for all outcomes. It says the greatest risk is not volatile markets, but the prospect of a surge in the number of large employers with big schemes going bust.

In such an eventuality, its first line of defence would be to raise the levy. This is hardly more good news for those still managing to fly above the flak. After that they can reduce indexation. Finally, they can go to the Government and ask for permission to slash payouts.

But the final back stop of asking the Government for money to bail it out seems to have been ruled out. Oh no, that will never happen, a spokesman said. Do you think the Eurocrats have taken charge?

Teresa Hunter is a freelance journalist