Security of defined benefit pensions
Pension Protection Fund
The security of workers' pensions is a matter of concern whenever a defined benefit pension scheme’s sponsoring employer becomes insolvent.
The Pension Protection Fund (PPF) was established in April 2005 as a lifeboat for defined benefit pensions when the sponsoring employer becomes insolvent.
Prospect has direct experience of this – our members in the AEA Technology pension scheme were put into the PPF when the sponsoring employer became insolvent.
So what is the Pension Protection Fund and what does it do? What compensation does it provide for pension scheme members?
What does the PPF do?
The Pension Protection Fund is a statutory body, independent of government, and is funded primarily by a levy paid by all schemes eligible for PPF protection.
Its role is to provide a safety net for eligible defined benefit pension scheme members when their scheme’s sponsoring employer becomes insolvent.
It does this by assuming responsibility for schemes assessed to be underfunded after an insolvency event and pay compensation to eligible members.
Schemes only transfer to the PPF if the scheme's assets amount to less than the cost of an insurance buyout of the benefits the PPF would pay if the scheme transferred to them.
What compensation does it pay?
Members over Normal Pension Age, or who already receive a survivor or ill-health pension, will normally receive 100% of the benefit under the scheme’s rules.
However members under Normal Pension Age, including those already receiving pension, are normally entitled to only 90% of the level of accrued benefit under the rules.
Members subjected to the 90% restriction will also have their compensation limited to a stated maximum permitted rate.
This cap on compensation levels depends on age and length of service (it is lower for younger people because the compensation will be paid for longer).
From 1 April 2018, the cap for a member at age 65 is £39,006 (or £35,105 with the 90% factor applied).
From 6 April 2017, the Long Service Cap came into effect for members who have 21 or more years' service in their scheme.
For these members the cap is increased by three per cent for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
The indexation of the compensation into the future will also have an impact on scheme members. The compensation attributed to service before April 1997 does not attract inflation increases.
Compensation attributed to service since April 1997 increases in line with the consumer prices index (CPI), subject to a maximum increase of 2.5%.
If you want to read more about the Pension Protection Fund we have a detailed briefing available here.