The Pension Protection Fund (PPF) is tasked with protecting workers saving in defined-benefit pensions.
These are final salary pensions where savers are guaranteed a retirement income. The income is paid based on the length of service and someone’s salary when they retire.
The PPF steps in when an employer cannot fund the promises made to savers in a workplace pension scheme.
The PPF looks after 5,422 pensions – 3,617 are in the red and 1,805 in surplus.
The total deficit at the end of October 2020 was £168.2 billion, while the total deficit of schemes in the black was £279.5 billion.
Total assets added up to £1,753.4 billion against liabilities of £1,921.6 billion.
The PPF is funded by a levy on schemes under protection, assets from pensions under PPF protection, money recovered from insolvent employers and returns from investments.
The money generated pays retirement benefits to the 230,000 workers and retirees belonging to the protected schemes and 150,000 members belonging to the Financial Assistance Scheme (FAS).
The FAS looks after workplace pensions without funds to pay the pensions they promised that ended between 1997 and 2005 when the PPF started.
What Do Pensions Managed By The PPF Pay?
When the scheme goes into protection, the PPF assesses the scheme to see if the fund has enough to meet the employer’s pension promises.
In most cases, many employer funds do not have the cash to pay benefits at the same level as the PPF, so the PPF rescues them.
The PPF then pays compensation to members set by the Department of Work and Pensions and depending on their pension status:
- If you had already retired at your normal pension age when the employer goes out of business, your pension benefits continue at the same level as before the scheme entered the PPF.
- This also applies to those who have retired early due to ill health and those who have inherited pension payments
- If you were below the normal pension age or chose to retire early when the scheme was taken over by the PPF, you will have your expected pension benefits cut by 10%
- High-earners will also have a benefit cap imposed
- Sometimes pensions are not uprated with annual cost of living increases, but pensionable service after 1997 rise by 2.5% a year
How Does The PPF Compensation Cap Work?
The PPF has a maximum compensation payment for members based on their salary and age.
The cap for a 60-year-old is £38,505 a year, but retirees do not receive that amount – the payment is 90% giving an annual pension of £34,655.
The PPF compensation calculation ignores any pension promises by an employer that come to above that amount.
The cap is reviewed each year, so compensation payments for high earners may change from year to year.
Commuting A PPF Pension
Commuting a pension means giving up compensation rights in return for receiving a lump sum.
Generally, this means taking income early as the lump sum and accepting reduced income payments from the fund in later life.
The lump sum is up to 25% of the fund value tax-free.
How much each member gets depends on the PPF commutation factor and any provision for a spouse’s pension. The PPF commutation factor considers the member’s age on retirement.
Can Savers Transfer Out?
No. Once your employer’s scheme enters the assessment period, transfers are frozen even if you want to consolidate your pot with other pensions or exercise your pension freedoms once you reach 55 years old.
The assessment period can last up to a year. During this time, the PPF manage creditor rights, but the scheme trustees continue to make the day-to-day administrative decisions and payments to retirees.
What happens if the PPF changes how inflation is measured?
The government has announced the measure of inflation for pensions will change by 2030.
The current measure used by the PPF is the Retail Price Index (RPI). This will change to the Consumer Price Index (CPI).
Generally, the RPI inflation number runs at about 1% higher than the CPI. This is due to including different factors, like the cost of housing, in the calculation.
The PPF has told the government that the switch will reduce the value of assets while pension liabilities will remain the same.
For retirement savers, this will mean lower fund values and cost-of-living increases over their lifetime, reducing total income paid.
Summary
The PPF can rescue pensions which is good for the workforce, however, they might not pay the full rate depending on your pot size and income.
It can come with a few pieces of criteria that you may have to meet, but as mentioned before it ultimately stops people from losing their pensions and being paid nothing if an employer can’t afford the pensions.
