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.Jump to full report >>
The Pension Protection Fund (PPF) was one of the measures set up by the Pensions Act 2004 in response to a series of high-profile cases in which pension schemes had wound up with insufficient assets to meet their pension commitments. It was established to pay compensation to members of defined benefit and hybrid occupational pension schemes where an employer has become insolvent, and where there are insufficient assets in the pension scheme to cover PPF levels of compensation. It commenced operations on 6 April 2005 and applies to schemes that started winding up after that date.
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. There are other ways in which PPF compensation does not necessarily 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.
Pension protection compensation rules have been subject to legal challenges:
The PPF is funded by a combination of:
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.
The Secretary of State is required to set a levy ceiling each year, at a level “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 and can be increased by more if the Board makes a recommendation to that effect and the Treasury approves. Once the PPF has set its estimate, it uses a “scaling factor” to distribute the levy proportionately among eligible schemes. The PPF aims to keep the levy stable for three years. On 16 December 2019, it confirmed that its levy rules for 2020/21 would remain “stable and broadly unchanged from previous levy year.” Its levy estimate for 2020/21 was £620 million (PPF confirms levy rules for 2020/21).
The PPF has a target of becoming self-sufficient by 2030. This is because it expects there to be fewer claims from schemes on the PPF in future and that the “the levy we need to collect will be small in comparison to our own assets and liabilities.” At this point, it will need to have confidence that it is holding enough money to pay compensation to members and protect them adequately from the risk of adverse conditions thereafter. (PPF Strategic Plan 2019/22). Its 2019 Annual Report said the PPF was 118.6% funded at end March 2019 – which it described as a high level of confidence that it remained on track to meet its self-sufficiency target by 2030.
Commons Briefing papers SN03917
Author: Djuna Thurley