- What is the Pension Protection Fund?
- What are the new developments on the cap on PPF compensation?
- How much compensation will I receive from the Pension Protection Fund?
- What happens to my pension if my employer goes out of business?
- What protections exist for my pension on privatisation?
- Can your employer change your pension scheme?
What is the Pension Protection Fund?
The Pension Protection Fund (PPF) was established in April 2005 as a lifeboat for defined benefit pensions when the sponsoring employer becomes insolvent.
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 members of eligible defined benefit pension schemes when the scheme’s sponsoring employer becomes insolvent.
It does this by assuming responsibility for schemes assessed to be underfunded after an insolvency event and pays compensation.
What are the new developments on the cap on PPF compensation?
There has been a development in the level of compensation provided by the Pension Protection Fund (PPF) that may affect members’ whose accrued pension rights exceeded the PPF cap on compensation.
In June 2018 the level of PPF compensation was challenged in the European Court of Justice (ECJ) in Hampshire v Board of the Pension Protection Fund. The landmark ruling determined that PPF compensation should be at least 50% of the value of members accrued pension. Under the existing rules the PPF cap on compensation meant that it was possible for members to receive compensation that was less than 50% of the pension they would have expected to receive from their previous scheme.
In June 2020 the High Court ruled on the case of Hughes v Board of the Pension Protection Fund. This case was brought as a result of the Hampshire judgement and the PPF plans to remedy the compensation levels to comply with the judgement. In this case, the High Court ruled that proposed remedy to Hampshire proposed by the PPF was inadequate. Additionally, a challenge was made that the compensation cap was discriminatory on the grounds of age.
There have since been updates from the PPF on their plans to remedy compensation to comply with the Hampshire ECJ judgement.
How much compensation will I receive from the Pension Protection Fund?
The compensation provided by the Pension Protection Fund (PPF) will be different to the pension you would have been paid by your pension scheme.
There are two key elements to the compensation, the level of the compensation and how your compensation will increase in retirement.
The level of the compensation you will receive if your scheme enters the PPF is complex to calculate. Broadly, members who are under pension age when their scheme enters the PPF receive 90% of the starting level of pension they were expecting under the rules of their previous scheme and those over pension age will receive 100%. The level of compensation is subject to an overall cap on the maximum level of compensation. This cap increases for those with over 20 years’ service.
The increases in retirement are different for compensation relating to service before and after April 1997. Compensation relating to service before April 1997 receives no increases in retirement. Compensation for service after April 1997 increases in line with the Consumer Price Index (CPI) capped at a maximum of 2.5%. In real terms the value of the compensation can be eroded by increases in price inflation measured by CPI. This is very acute for members with service before April 1997.
Members can read our detailed briefing on PPF compensation on the Prospect Library.
What happens to my pension if my employer goes out of business?
The security of workers’ pensions is a matter of concern whenever a defined benefit pension scheme’s sponsoring employer could become insolvent. Defined benefit pension schemes are ultimately a promise to provide a pension in line with the pension scheme rules. The benefits are guaranteed by the sponsoring employer, this guarantee ends when the sponsoring employer becomes insolvent.
The reason that losing a sponsoring employer is problematic is because a lot of defined benefit schemes are underfunded and rely on the sponsoring employer to make recovery payments to increase the funding level of the scheme. If the sponsoring employer is insolvent, they cannot make those payments and there aren’t sufficient assets in the scheme to pay all of the liabilities.
Pension schemes are funded in advance by employee and employer pension contributions. However with defined benefit schemes the exact cost of providing these benefits cannot be determined in advance. The scheme has to meet any costs that occur due to lower than expected investment returns and increasing life expectancy. Actuarial valuations of the scheme take place every three years. They determine the future level of employer contributions, the funding level of the scheme and schedule for recovery payments.
The Pension Protection Fund (PPF) was established in April 2005 as a lifeboat for UK based defined benefit pension schemes when the sponsoring employer becomes insolvent to ensure that even in the event of insolvency, pension scheme members get a minimum level of compensation.
Not all schemes will enter the PPF after employer insolvency. Schemes with assets that could purchase pensions with an insurance company that would provide a higher level of benefits than PPF compensation will not enter the PPF. In this scenario members could still get lower benefits than they were originally entitled but higher benefits than the PPF provides.
What protections exist for my pension on privatisation?
Staff transfers from Central Government – New Fair Deal
New Fair Deal provides members working in central government with pension protection on privatisation. In simple terms it allows members to contribute to their existing scheme (Civil Service Pension Scheme) after their role is privatised.
For members who were privatised under Fair Deal, the predecessor to New Fair Deal, New Fair Deal will apply on retendering. Under Fair Deal, employers on privatisation were required to offer their own scheme that was certified by the Government Actuaries Department to be broadly comparable scheme to the employees transferring at privatisation. Upon retendering, rather than a continued requirement to offer a broadly comparable scheme, members within scope of protections are able to re-join the public sector scheme they left at privatisation.
New Fair Deal guidance.
Staff transfers from Local Government – Best Value Transfers Direction
For Local Government staff similar protections are offered via the “Best Value Authorities Staff Transfers (Pensions) Direction 2007”
Best Value Authorities Staff Transfers Direction guidance.
Can your employer change your pension scheme?
Unfortunately we do have employers who seek to make detrimental changes to member’s pensions.
In the past this has commonly involved a detrimental change to the calculation of future service benefits in a DB Pension Scheme following an actuarial valuation that shows the costs of the scheme to the employer have increased.
The hard fact is that in almost all cases the employer will have the right to terminate or amend pension’s provision for employees.
Accrued rights in the pension scheme are protected. The employer cannot make changes to the pension rights you’ve already built up in a scheme; however they can after the completion of a consultation change future pension provision.
Prospect seek to work constructively with employers consulting on changes to members pensions. We will request more information from employers when the justification of the need for the changes is not clear, consult our members on their views on the proposals and potential counter proposals and submit a response from the union on our position on the proposals.
Get support as a member
Speak with your representatives:
If you work in an organisation that has local Bectu representatives, you should speak to them about any work-related issues.
Call the member contact centre on 0300 600 1878 or email [email protected]