TPAS - The Pensions Advisory Service

Pension Protection Fund

On 6 April 2005, the government set up a fund, known as the Pension Protection Fund, with the following aim:

'to provide increased protection for members of defined benefit and hybrid schemes by paying compensation should the employer become insolvent and the pension scheme is underfunded.'

The Pensions Protection Fund (PPF) covers occupational pension schemes that were not in wind up when the PPF became effective (6 April 2005). However, schemes that are not yet in wind up will not be covered if an 'insolvency event' has already taken place prior to 6 April 2005, unless a further 'insolvency event' takes place after that date.

In many cases the benefits paid by the PPF will be limited. The PPF aims to provide benefits as follows:

• 100% of benefits for members over normal retirement age

• 90% of benefits for members below normal retirement age (including early pensions except where early retirement was on the grounds of ill health)

• 100% of incapacity pensions (regardless of age)

• a compensation cap of £27,770.75 will apply, for members below normal retirement age at the date of assessment, on benefits paid out, with a proportionally lower cap for members who are below age 65, unless they are in receipt of a pension on the grounds of ill health

• increases will not be paid on benefits built up before 6 April 1997

• increases based on the Retail Prices Index to a maximum of 2.5% will apply to benefits that accrue from 6 April 1997.

A Board consisting of a Chairman, Chief Executive and at least 5 other members, all appointed by the government runs the PPF. The PPF is funded by a levy on salary-related pension schemes. In the first year of operation, the levy was fixed at a flat rate for all schemes. For the current and future years, the amount of levy each scheme will pay will depend in part on the PPF's assessment of how likely the pension scheme is to find itself without financial support from the employer that sponsors it and end up with a shortfall in funds.

Visit the PPF web site, www.pensionprotectionfund.org.uk, to find out more.

Q & As

I am in a money purchase scheme. Could my scheme qualify?

No. The PPF only covers defined benefit (final salary) schemes and defined benefit elements of hybrid schemes.

My scheme started to wind up before 6 April 2005. Will the PPF help?

To be eligible for compensation from the PPF the scheme must not have commenced wind up before 6 April 2005 and there must also be a qualifying insolvency event on or after 6 April 2005. If your scheme commenced wind up before 6 April 2005, assistance may be available from the Financial Assistance Scheme.

What happens if my scheme is potentially eligible for the PPF?

The assessment period starts from when the employer became insolvent. During this period, the PPF will decide whether it will cover the scheme. The main purpose of the assessment period is to see whether it is possible for the scheme to be rescued, but also to see whether the scheme has sufficient assets to provide benefits at least as good as PPF compensation. If either of these were possible, then there would be no need for the PPF to assume responsibility.

During the assessment period, no further contributions can be paid, no new members admitted and no further benefits accrue. It is also necessary for pensions in payment to be reduced to the PPF level.

The Board of the PPF will also review any discretionary decisions or rule changes in the 3 years preceding the assessment period and possibly decide to disregard those decisions or changes.

The assessment period will last at least 12 months.

If my scheme were accepted by the PPF, how much would I receive?

In broad terms, members who were over pension age at the start of the assessment period get 100% of their pension. Members under the pension age at the start of the assessment period will get 90% of their pension (subject to a cap equating to £26,050 at 65). Members in receipt of pension on grounds of ill health but under the scheme pension age will not face a reduction nor will those in receipt of a survivor's pension. Pensions in payment get an annual increase of RPI up to 2.5% in respect of post 6 April 1997 pensionable service only

If my scheme enters the PPF, will I be able to give up part of my pension for cash?

Yes, under the PPF's rules, retiring members can give up part of their compensation for a tax-free lump sum.

When PPF compensation is in payment, will it increase?

Compensation in respect of pensionable service on or after 6 April 1997 will be increased each year in line with the Retail Prices Index to a maximum of 2.5%.

Can I transfer out if my scheme enters the PPF?

If your scheme enters the PPF only members whose service ended before the start of the assessment period and had less than three months' pensionable service, will be entitled to a transfer payment.

If your scheme is in the assessment period, the scheme's trustees can only pay out a transfer value if before the assessment date, a member has requested and accepted the transfer value in writing and also designated a scheme willing to accept it. Furthermore, the scheme's trustees must be satisfied the transfer value does not exceed the cost of securing benefits which the PPF would pay should it assume responsibility and it does not jeopardise the objective of ensuring liabilities do not exceed assets.

What happens should I die?

If an individual, who is receiving compensation from the PPF dies, compensation at a rate of 50% of the entitlement they are receiving at the date of death is payable to their spouse or partner.