A Brief History of the Pension Protection Fund
The Pension Protection Fund (PPF) was founded as part of the Pensions Act in 2004 and officially ‘opened’ in 2005. It is a statutory public corporation accountable to Parliament through the Secretary of State for the Department for Work and Pensions (DWP). Although set up by the Government, it is not funded by Government or taxpayers’ money.
2005: Officially opened
2006: 13 Pension schemes, with 7,345 members transferred
2008: 66 Pension schemes with 13,000 members transferred
2010: 113 schemes now transferred with 34,286 members
2012: The UK Coal Pension Scheme transfers to the PPF
2016: The BHS pension schemes come into assessment.
2017: The British Steel Pension Scheme comes into assessment
2018: There are now 236,000 members of transferred Pension schemes.
Current Pension schemes under assessment include Carillion, Hoover and Toys ‘R’ Us.
What does the Pension Protection Fund do?
The best way to simply describe The Pension Protection Fund (PPF) is to look at it as a safety net for Pension schemes. Should a final salary (Defined Benefit) Pension scheme be unable to pay current or future pension payments, it can ask to be assessed by the PPF and ultimately, if eligible, be transferred into the Fund. In the event that a company goes bust without a safety net, members of that Pension scheme could lose their pension benefits.
How does it work?
Following a period of assessment, a failed scheme’s funds will be transferred to the Pension Protection Fund providing the scheme meets the PPF criteria. Members will then receive their pension (compensation) payments direct from the PPF. The level of benefits members will receive is dependent on whether the normal pension age has been passed on the date the employer became insolvent. The normal pension age can vary according to the rules of the former pension scheme.
If a member had already passed the normal pension age, or retired through ill-health, the compensation will be equal to 100% of the scheme’s pension on the insolvency date. However, annual increases to payments will be restricted. Only payments from pensionable service built up after 5 April 1997 will be increased in line with inflation, up to 2.5% a year. Payments built up before this date won’t be increased.
Where a member had not reached the scheme’s normal pension age when the employer became insolvent, there will be a reduction in payments to 90% of the scheme’s pension. Compensation payments may also be subject to a compensation cap. Further details of this can be found at PPF Compensation Cap.
Who pays for the Pension Protection Fund?
The PPF is funded by a levy. Eligible pension schemes are required to pay the levy. Almost all ‘defined benefit’ occupational pension schemes (final salary) and schemes that have defined benefit elements are eligible. This levy helps to make sure that schemes’ members have some protection and will receive compensation should an employer become insolvent.
The levy is calculated in much the same way as an insurance premium and is based on a number of risk factors. There is also an additional risk-based levy that has to be paid by eligible schemes that are in deficit or not fully funded. It is calculated based on the likelihood of the scheme being unable to pay out pensions to its members. This could be due to insufficient funding, insolvency and the potential size of the claim that could potentially be passed to the PPF.
Once in the PPF, you cannot transfer out to another scheme. Therefore, you cannot consolidate all your pensions or take advantage of pensions freedom from age 55. You will not be able to take your pension early, but only at your scheme’s normal retirement age.
The PPF 7800 Index
Every month, The Pension Protection Fund publishes their PPF 7800 Index, which gives the latest estimated funding position of all eligible Defined Benefit (final salary) pension schemes. It is calculated on a section 179 basis.
At the end of March 2019, the aggregate deficit is estimated to have increased to £43.9 billion during the month from a deficit of £8.6 billion at the end of February 2019. Of the 5,450 eligible pension schemes, 3,267 (60%) are in deficit and 2,183 schemes show a surplus.
It can be very disconcerting to learn that your pension fund is in deficit and could fall under assessment by the PPF. Being in deficit does not automatically mean a pension would enter the PPF as the trustees can put a plan in place to clear the deficit. This, of course, would be the best option, but if a company does become insolvent, the Pension trustees would advise their members of the situation. However, it would be better to know the current funding status of your pension fund.
What can I do if I have concerns?
In the first instance, contact your scheme and request a statement as this may not be sent out to members automatically. This will include details about the date your pensionable service started, the rate at which your benefits build up, your pensionable salary and other benefit details.
You can also request a copy of the latest report & accounts. This will include an actuarial valuation showing the financial position of the scheme along with an investment performance review. It should also advise if the scheme is in deficit or surplus.
Additional documents can be requested on how the scheme is run and a transfer quote, but be sure to check first if there is a charge for any of the above items.
I want to find out more about pensions
If you would like to find out more, please contact us at Harrison Brook. The initial consultation is completely free of charge and we are well placed as Europe’s leading independent financial adviser to help. Whether it be a pensions related enquiry, or a general investment, Retirement or Financial planning situation you would like to discuss, please contact us today!