House of Commons Library

Overview of the Pension Protection Fund

Published Tuesday, July 3, 2018

This Commons Library briefing paper looks at the Pension Protection Fund (PPF) which was one of the measures set up by the Pensions Act 2004. It was in response to a series of high-profile cases in which pension schemes had wound up with insufficient assets to meet their pension commitments. The PPF started operations on 6 April 2005 and applies to schemes that started winding up after that date.

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Eligibility

The PPF covers defined benefit schemes and the defined benefit elements of hybrid schemes Exceptions include public service pension schemes and schemes with a ‘Crown Guarantee’.

For a scheme to enter the PPF the following criteria must be satisfied:

  • the scheme must be a scheme which is eligible for the Pension Protection Fund;
  • the scheme must not have commenced wind up before 6 April 2005
  • an insolvency event must have occurred in relation to the scheme's employer which is a qualifying insolvency event
  • there must be no chance that the scheme can be rescued
  • there must be insufficient assets in the scheme to secure benefits on wind up that are at least equal to the compensation that the Pension Protection Fund would pay if it assumed responsibility for the scheme

 

Qualifying trigger

The trigger for a scheme entering a PPF assessment period is generally that an insolvency practitioner notifies the PPF that “qualifying insolvency event” has occurred in relation to the employer of an eligible scheme.

The purpose of an assessment period is to determine whether the PPF should accept responsibility for the scheme. The PPF explains:

During the assessment period, and in order to determine whether it should assume responsibility for an eligible pension scheme, the Pension Protection Fund will look to establish answers to two key questions:

  • can the pension scheme be rescued?
  • can the pension scheme afford to secure benefits which are at least equal to the Pension Protection Fund protected liabilities if it assumed responsibility for the pension scheme?

If the answer to either of these questions is ‘yes’, the Pension Protection Fund will cease to be involved with the pension scheme and the pension scheme will either continue or wind-up outside of the Pension Protection Fund.

However, if the answer to both is ‘no’, and the relevant processes and procedures have been completed, the Pension Protection Fund will assume responsibility for the pension scheme.

 

PPF compensation

The PPF provides two levels of compensation – in broad terms -100% to people who have reached pension age or are in receipt of an ill-health or survivors’ pension at the time the scheme enters the PPF assessment period and, in other cases, 90% subject to a cap. The PPF explains:

The Pension Protection Fund pays two levels of Compensation. The level of Compensation which you qualify for will depend on your status at the start of the Assessment Period for your Former Pension Scheme.

Your Compensation will be at 100% level of Compensation as at assessment date, if at the start of the Assessment Period you:

  • had reached the scheme’s Normal Pension Age
  • were receiving a survivors’ pension
  • were receiving a pension on the grounds of ill-health

Your Compensation will be at 90% level of Compensation as at assessment date and subject to the Compensation Cap, if at the start of the Assessment Period you:

  • were below the scheme’s Normal Pension Age
  • you were not receiving a survivors’ pension or pension on the grounds of ill-health

For the majority of those below normal pension age when the scheme enters a PPF assessment period, the PPF will pay a 90% level of compensation, subject to a cap.

The compensation cap

The cap produces maximum standard compensation of £35,105.56 at age 65 in 2018/19. There is now an enhanced long-service cap (increased by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap). This was in recognition that the cap – which was intended partly as a cost-control measure and partly to prevent moral hazard – had a disproportionate effect on scheme members with long service (HCWS163, 15 September 2016; DWP, consultation on the draft PPF (Modification) (Amendment) Regulations 2017).

There are other ways in which PPF compensation does not match what would have been provided by the pension scheme had not wound up. For example, indexation is only provided on rights accrued from April 1997.

Funding

The PPF is funded by a combination of:

  • The assets transferred from schemes for which it has assumed responsibility
  • Recoveries of money, and other assets, from those schemes’ insolvent employers
  • An annual levy raised from eligible pension schemes
  • Investment returns on assets held by the PPF

 The pension protection levy is comprised of a risk-based levy (required by law to be at least 80 per cent of the total) and a scheme-based levy, making up the remainder.

Setting the levy

The Secretary of State is required to set a “levy ceiling” each year. It is set at a level that “is sufficient to allow the Board of the PPF to raise a levy that ensures the safe funding of the compensation it provides, whilst providing reassurance to business that the levy will not be above a certain amount in any one year.”

The ceiling is increased each year in line with earnings. It can be increased by more than this, but only if the Board makes a recommendation to that effect and the Treasury approves.

Once it has set its levy estimate, the PPF uses a “levy scaling factor” to distribute the levy proportionately among eligible schemes.

The PPF aims to keep the levy stable for three years.  Its levy estimate for 2018/19 was £550 million, over 10 per cent lower than the previous year. In broad terms, it expected its proposals for the years 2019/20 to 2022/23 to result in lower levy bills for smaller employers, higher ones for larger ones (PPF, The 2018/19 Levy Policy Statement, December 2017)

Current funding status

As at 31 March 2017, the had assets of £28.7 billion. Its funding ratio was 121.6 per cent, up from 116.3 per cent the previous year. It said:

Whilst this might seem a comfortable margin, it is important to remember that our reserves in excess of our current liabilities, at £6.1 billion, remain a small fraction of the total deficit of £226 billion at the end of March 2017...for the schemes we protect (PPF Annual Report 2016/17, p12)

This meant it continued to progress towards its funding objective, which is to be "self-sufficient" by 2030, by which time it expects new claims to be low in relation to its liabilities (Ibid).

Legislation

Relevant primary legislation includes:

 

Further information

Library briefing papers

More background to its establishment of the PPF is contained in a Library Briefing Papers.

 

 

Commons Briefing papers SN03917

Author: Djuna Thurley

Topic: Pensions

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