Most employers sponsoring a defined benefit scheme now pay a levy into the PPF - although there are schemes that are exempt (such as unfunded Public Sector schemes and Public Sector schemes providing pensions to local government employees, etc.).
If your sponsoring employer becomes insolvent after April 2004, (i.e. it can’t meet its obligations to its creditors) and the remaining assets in the scheme would be insufficient to meet the pension scheme’s liabilities, some of your benefits may be secured by the PPF.
The PPF will start to collect data about the pension scheme during an ‘assessment period’ (which will usually take about 12 months). During that time, it will try to see if benefits can be paid for by other means. If this cannot happen, and the scheme cannot provide the PPF level of benefits, the pension scheme may enter the PPF for the purpose of paying compensation to the scheme members.
The PPF lists in order of priority how each category of member will be treated. For example, the first to receive compensation would be those listed under category a) below.
a) You will generally receive 100% compensation (i.e. what you should have received from your scheme at the time your employer went bust) if:
- you have reached your Normal Retirement Age, or
- you are in receipt of your pension on the grounds of ill-health, or
- your dependants are in receipt of their pensions, following your death.
Your compensation will increase each year in line with inflation, up to 2.5%, but only on pensionable service after 5th April 1997. This increase may well be lower than that which your scheme would have provided.
b) If you don’t qualify for 100% compensation you should receive up to 90% compensation. This compensation level is limited to an overall maximum or ‘cap’ which is recalculated every year, and varies according to your age. For the year April 2008 to March 2009 the cap for someone aged 65 is set at £27,770.72, after the 90% limit is applied.
- If you are retired (that is, receiving a pension from your scheme) but have not yet reached the normal pension age of the scheme, you will probably find that your payments are reduced.
If you have not retired and are not yet taking any pension payments, until you reach your scheme’s normal retirement age, based on your pension at the time your employer went bust, your compensation amount will increase each year in line with inflation, up to a maximum of 5%. You may find that this is not as much as your pension would have increased under the scheme.
The Pension Protection Fund - as important a safety net as it is - is not the saviour of pensions that many people first thought it would be. It has not been designed to, nor will it make your pension scheme or any benefits arising from your scheme any better than it already is.
Crucially, any pension increases made under the PPF (before or during payment) are limited, and could be much lower than those that would have been available from your pension scheme.
Furthermore, spouse’s, civil partner’s and unmarried partner’s pensions that are payable on the death of a member (where scheme rules permitted) are limited to 50% of the member’s pension. As many schemes pay two thirds spouse’s pensions, this could lead to a sizeable reduction.
Any life assurance cover provided by your scheme will no longer apply once the PPF begin their assessment period of your scheme. This is an important consideration when thinking about your overall life insurance protection.
Summary
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This Quicknote forms part of our Module ‘How secure is my pension?’ and should be read alongside the other Factsheets and Quicknotes in the series.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
A safety-net for pension schemes v1.2 Generic
Last updated 26/03/2009
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