What is the Pension protection Fund?

Following on from last week’s blog What is a Defined Benefit Pension Scheme? which you can read here, this week I will look at the implication of Carillion’s Pension Scheme deficit on the members and what it means for the members of the Carillion Pension Scheme and other Schemes that go into the Pension Protection Fund (PPF). And answer the question What is the Pension Protection Fund?

Carillion operates 13 defined benefit pension schemes across the UK. There are in the region of 28,500 members and more than 12,000 of them are already receiving a pension. It has been reported that the pension scheme is £900bn in deficit. So what does this mean for the 28,500 members?

What happens to Defined Benefit pension when a company goes into liquidation?

Because of how DB schemes work, they are interwoven with the company unlike defined contribution pensions in which individuals have their own pot of money ring-fenced for them. When a Company like Carillion or BHS goes into liquidation and their DB pension scheme is in deficit, the pension scheme will fall into the Pension Protection Fund (PPF).

What is the Pension Protection Fund?

The PPF is a Pension Fund which acts as a safety net for people’s pensions. The scheme absorbs Company Pension Schemes where the companies have gone into liquidation and where there are insufficient assets in the pension scheme to cover the Pension Protection Fund level of compensation. The PPF then takes over the payment of the members’ benefits. Before the PPF was established, in circumstances such as Carillion’s members could have lost their pension benefits entirely. The PPF was created in the Pensions Act 2004.

Will the benefits be the same?

Once a pension scheme has gone into the PPF, members’ benefits will be restricted. How pensions are impacted depends upon a number of factors including whether the member is retired, over the scheme’s normal retirement age, retired due to ill health and so on.

Some members may receive 90% of their full pension subject to a cap and have pension increases restricted.

There is no option for members to transfer out once a scheme has gone into the PPF.

For more information, refer to the PPF website here.

How is the PPF funded?

The PPF is funded by levies on all eligible defined benefit schemes.

The levy is based on a scheme based element and a risk based element:

  • 20% of the pension protection levy is raised via the Scheme Levy.
  • 80% of the pension protection levy is raised via the risk-based levy. The risk based levy depends on the level of underfunding in the scheme and the probability of the employer becoming insolvent in the following year.

 The PPF is currently 121% funded based upon the scheme’s liabilities.

Conclusion

Although it is not ideal, the PPF provides protection to members of pension schemes whose sponsoring employer has gone into liquidation. The benefits may be restricted in terms of income and inflationary caps however, pensions are still paid and it isn’t all doom and gloom.

If you have a defined benefit pension or any other pensions or financial matters that you would like to discuss, please contact me for a no obligation initial meeting.

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