A former minister has warned that the government’s “lifeboat” scheme for company pensions is at risk from a huge wave of corporate defaults which in extreme circumstances could result in a 10% cut to pensioner incomes. The Pension Protection Fund is the “insurance policy” for millions of people in final salary-style company pension schemes, promising to pay out if the employer becomes insolvent. It is funded by employers, who pay an annual levy which means the scheme is currently around £6bn in surplus. Around 230,000 people currently rely on the PPF for pension payments, including 11,500 former employees of Kodak, which had a £1.5bn shortfall in its pension when it fell into the PPF in 2019. It also looks after 27,000 members of the Carillion pension scheme, with had an £800m deficit. Steve Webb, who was pensions minister in the coalition government between 2010 and 2015 and oversaw the PPF, said that a fresh Covid-19-driven spate of company collapses could result in the scheme using up its surplus and resorting to “extreme measures”. If many more large schemes have to be rescued by the PPF, it will also result in a potentially sharp increase in levies on existing employers, some of them already struggling. Gloucester MP Richard Graham said a local manufacturing firm, Norville Group, was pushed into administration last month partly because of the levies it had to pay the PPF. “The PPF levy absorbed all Norville profits of the last few years, weakening their balance sheet and paving the way for a cash flow crisis,” said Graham. Webb, now a consultant for actuaries LCP, modelled two scenarios, one involving a £10bn hit to the PPF from the Covid-19 recession, and one of £20bn. But he added: “If several larger employers were all to face insolvency in the coming years, even the more serious £20bn hit could prove to be an under-estimate.” The study suggests that the PPF should be able to absorb a £10bn hit from insolvencies, and survive a £20bn hit by raising levies on companies. But above that level of corporate insolvency, it may be forced into the “nuclear” option of cutting payouts to existing pensioners to 90% of their current level, although this would require parliamentary approval. “The PPF has a range of levers it can pull to absorb increased cost pressures without having to resort to cutting benefits to members. But we cannot be complacent. Recent history has been a reminder that the crucial question is whether the insolvencies which we are likely to see in the coming years will hit firms which also have large DB deficits. There remains a risk that too many such insolvencies could put a serious strain on the system,” said Webb.