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The Pension Protection Fund (PPF) is a government-backed body that deals with defined-benefit schemes in the event that an employer goes bust. The lifeboat fund – as it is often dubbed – is in place to ensure members of defined-benefit pension schemes do not suffer financial hardship if the schemes sponsoring employer goes bust.
Examples of companies which have gone bust and subsequently have passed their pension commitments to the fund include big names such as Thomas Cook, Carillion, BHS and British Steel.
Rupert Jones of the Guardian commented in 2018 that, “(Carillion) had a pension deficit of £580m but is now likely to rise to at least £800m because it no longer has a solvent business standing alongside it. The company’s crash into liquidation has thrown the spotlight on other firms with huge pension scheme deficits such as IAG, BT and BAE.”
A pension deficit is a situation whereby a salary-related pension scheme doesn’t have sufficient assets to pay for all its future liabilities – notably pension payments to retired members.
The Pension Protection Fund was created in 2004 in response to a growing number of companies operating with a deficit. One of the main reasons behind this is the fact that people are living longer. Quite simply, the longer a scheme member lives, the greater the liability.
In a study conducted by the Pensions and Lifetime Savings Association (PLSA), it was claimed that most defined benefit schemes had a sustainable model for meeting future payouts. However, the PLSA found that three million savers in the remaining schemes had only a 50% chance of receiving the benefits they have been promised.
The PLSA went further to claim there was a “real possibility” of collapse for more high-profile pension schemes.
deVere Acuma is pleased to offer our complimentary pension review service. A service created to help people with defined-benefit pensions better understand their options.
If a member is already drawing down from their pension and is over the schemes official retirement age, the member will continue to receive their benefits in full. However, in some cases, the annual increase to a member’s pension may not be as generous as the scheme had originally promised.
If you are yet to reach retirement age, then your pension is still protected, however, the guarantee drops to 90% of the original amount the member would have expected.
The PPF provides a crucial safety net to members of defined benefit pension schemes, however, it is important to discuss what benefits and options a member loses once the scheme is transferred to the PPF.
Members who are yet to reach retirement age will face a 10% reduction in benefits
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.
Payments are restricted to 90 per cent of what you received, up to a cap based on your age when your employer went bust. The cap for a 60-year-old is currently £38,505 a year, then 90 per cent is applied to give an annual payment of £34,655. Payments will be increased each year, as above.
Once in the PPF, you cannot transfer out payments to another scheme. This means you aren’t able to consolidate all your pensions into a Self Invested Personal Pension. Nor can you utilise the Pension Freedoms Act allowing access from age 55.
You cannot take your pension early. You have to wait until you reach your scheme’s normal retirement age. This is likely to be between ages 60 to 65 but will depend on the scheme rules.