The PPF can step in to take over your defined benefit pension scheme if your company goes bust. Here’s what you need to know.
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What is the Pension Protection Fund?
The Pension Protection Fund (PPF) was set up in April 2005 under the Pensions Act 2004.
It can step in to make payments to members of defined benefit pension schemes when an employer goes bust and doesn’t have enough money or assets to fulfil its pension obligations.
At the end of February 2016 the PPF had 223,688 members, of which 118,764 are currently receiving compensation worth an average £4,210 a year. In total the scheme has paid out £2.3 billion.
How is the PPF funded?
The PPF takes on the assets of schemes and recovers what it can from insolvent employers.
It also collects an annual Pension Protection Levy, much like an insurance premium, from all the eligible schemes it protects.
The fund also makes returns on its own investments.
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How does the PPF work?
When an employer with an eligible defined benefit scheme becomes insolvent it will enter what is known as the 'PPF assessment period'.
During this period, trustees remain in control of a scheme and any payments already being made.
The trustees are also tasked with working out how much money and other assets are leftover and making sure all member details are up to date.
At the same time the PPF will try to recover what it can from the insolvent employer by acting as a creditor on behalf of the scheme.
The scheme will not be eligible for the PPF’s help if it is rescued and a new employer takes on responsibility or the scheme has enough assets or money to buy benefits with an insurance company which are at PPF levels of compensation or above.
Making a decision on whether or not the PPF should take over a scheme can take a long time - normally the PPF says it aims to complete assessment periods within two years.
How much can you get from the PPF?
If the PPF takes on responsibility for a scheme, it will take over making payments to scheme members. These will vary depending on your status.
If you have retired
Members that have already reached the scheme’s normal pension age will generally get 100% compensation of what they were receiving from the scheme at the time their employer went bust.
Those that have retired because of ill-health as well as those receiving survivor pensions will also normally get 100% compensation.
These compensation payments will rise each year in line with inflation, capped at a maximum of 2.5%. However, this increase only applies to pensionable service from 5th April 1997, so payments relating to pensionable service before this date will not rise.
If you retired early
Meanwhile, members that retired early so have not reached their normal pension age for the scheme will generally get 90% compensation based on what the pension was worth at the time.
The annual compensation is subject to a cap, which is recalculated every year. However, the PPF says the vast majority are not impacted by this ceiling.
The cap at age 65 is, from 1st April 2016, £37,420.42 (this equates to £33,678.38 when the 90% level is applied) per year.
However, the earlier you retired, the lower the annual cap is set, to compensate for the longer time you will be receiving payments. You can view a full list of the compensation caps for each age group here.
Again once compensation starts getting paid only payments relating to your pensionable service from 5 April 1997 will rise each year in line with inflation capped at 2.5%, not those made before.
If you have yet to retire
Those that have not yet retired are also entitled to get 90% compensation when they reach their normal pension age for the scheme, subject to a cap.
From 1 April 2016 the cap for a 65-year old is, £37,420.42 (this equates to £33,678.38 when the 90% level is applied) per year.
You can view a full list of the compensation caps for each age group here.
Once compensation starts getting paid, only payments relating to your pensionable service from 5 April 1997 will rise each year in line with inflation capped at 2.5% - those made before this date won’t rise.
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Who has the PPF helped?
Since it was established back in April 2005, the PPF has had to take on many schemes from failed employers.
You can see a full list of schemes that have been transferred to the PPF here.
High profile ones include HMV in May 2014, Kodak in September 2015 and Peacocks in March 2016.
The PPF in action
The latest test of the PPF has been the collapse of high street retailer BHS.
The pension scheme for the 20,000 past and present employees of the firm reportedly has a black hole somewhere in the region of £570 million.
BHS is now in the assessment period, which will determine if the scheme is eligible for the PPF’s help.
Where to find more information
You can find out more on the Payment Protection Fund website.