There are more than 125,000 people who have lost significant amounts of their pension benefit resulting from their pension scheme being wound-up and unable to secure full benefits for the membership. This has rightly caused widespread concern and has hit the media headlines regularly.
In response to public and media pressure, the Government set up the Financial Assistance Scheme (FAS) which will help some of the scheme members who have suffered when their pension scheme wound-up. These people are not covered by the Pension Protection Fund because their scheme began to wind-up before the PPF came into force.
Not all wind-up victims are covered by the FAS
The FAS is designed to help certain members of defined benefit schemes that began winding up between 1st January 1997 and 5th April 2005. It will top-up the pensions (up to a maximum amount) of those members whose schemes would be unable to pay the whole of their pension due to the insolvency of the scheme (although to date few pensioners have actually received the benefit).
Due to public pressure, the levels of support to be offered by the FAS have been increased in the 2007 Budget announcement. These proposed new rules bring the FAS benefit much closer to the benefit offered by the Pension Protection Fund. (See our Quicknote: A safety net for pension schemes)
Where an eligible scheme is unable to pay the whole of a member’s pension, they will receive a proportion of their accrued pension benefits from their scheme; and eligible members will be topped up by the FAS, up to 80% of their ‘expected’ pension, subject to a maximum of £26,000 p.a.
These benefits are higher than those previously set, as a result of an increase of funds of up to £8bn being made available to the FAS, in the Budget on 21st March 2007.
Example:
Peter’s pension scheme started to wind up in July 2004 because the sponsoring employer was in receivership. Peter was due to retire on his Normal Retirement Date in December 2004.
The scheme did not have sufficient assets to pay Peter’s expected pension of £20,000 a year, so in December 2004, Peter started to receive only £12,000 a year from his scheme.
Assuming that his pension scheme is eligible for the FAS, he should receive a top-up from the FAS to bring him up to 80% of his expected pension, which is £16,000.
The FAS will top up his payments by £4,000 a year in addition to the £12,000 being paid to Peter by his pension scheme.
Top-ups will only take place at age 65, so those scheme members with a Normal Retirement Date before then will have to wait (e.g. someone with a NRD of 60 will have to wait 5 more years to benefit from the scheme).
The FAS may also make awards to surviving spouses and civil partners of scheme members who died after wind up. Where the member died before wind up, their dependents will also be protected. The FAS has set definitions on who is eligible for awards.
Members of most schemes commencing wind up on or after 6th April 2005 are not eligible for the FAS but they may be eligible for compensation under The Pension Protection Fund.
The deadline for eligible schemes to have applied for help from the FAS has been extended from 28th February 2007 to 31st August 2007. The Government announced the extension on 27th February 2007 to assist ‘a small number of pension schemes who are in negotiation with employers in relation to insolvency and qualification for the Financial Assistance Scheme’.
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.
What is the Financial Assistance Scheme v1.7 Generic
Last updated 22/03/2007
