On 6 April 2005, the government set up a fund, known as the
Pension Protection Fund (PPF), 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.'
Eligibility
The 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.
Assessment
The PPF is notified when the employer suffers an insolvency
event. The scheme then enters an assessment period, with the
PPF establishing whether the scheme is eligible for
membership. If the PPF establishes that the scheme cannot be
rescued and cannot afford to secure the members' benefits, the
scheme is likely to be accepted into the PPF.
Compensation
In many cases the benefits (known as
compensation) paid by the PPF will be limited. The
PPF aims to provide compensation as follows:
- 100% of benefits for members over normal retirement age
(NRA) as at the date assessment begins;
- 100% of benefits for members in receipt of ill health
pensions;
- 100% of benefits for those in receipt of survivors'
pensions;
- 90% of benefits for members below NRA as at the date assessment
begins. This includes those paid benefits
early, except where early retirement was on the grounds of ill health);
- a compensation cap of £29,897.42 (as at April
2011) applies for members below NRA as at the
date assessment begins (unless they are in receipt of a
pension on the grounds of ill health). The cap
is adjusted according to the age at which compensation comes
into payment;
- annual increases will not be paid on benefits built up before 6
April 1997; and
- increases based on the Retail Price Index
(RPI) to a maximum of 2.5% will apply to benefits that
accrue from 6 April 1997.
Levy
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.
Contact the PPF
The Pension Protection Fund
Knollys House
17 Addiscombe Road
Croydon
Surrey
CR0 6SR
Telephone: 0845 600
2541
Email: information@ppf.gsi.gov.uk
Website: www.pensionprotectionfund.org.uk
Publications
Copies of the following publications
are available from the PPF.
- Introducing the PPF
- Ten things you should know about the PPF
- Your journey to becoming a member of the PPF
- Protecting people's pensions
Q & A's
Yes. On the 6th of April 2011 regulations which
detail how PPF compensation is affected for those who get divorced
came into force. Said regulations allow a member's pension
compensation to be shared with their former spouse if a court
issues a pension compensation sharing order. A factsheet on the new
regulations has been issued by the PPF and can be read here: PPF Factsheet
No. The PPF only covers defined benefit (final salary) schemes
and defined benefit elements of hybrid schemes.
No. 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.
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.
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 £29,897.42 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
Yes, under the PPF's rules, retiring members can give up part of
their compensation for a tax-free lump sum.
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%.
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.
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.
