Pension Protection Fund
Encyclopedia
The Board of the Pension Protection Fund (the PPF) is a Statutory Fund in the United Kingdom
. It was created under the Pensions Act 2004
. The Board of the PPF is a Statutory Corporation
responsible for managing the Fund and for making payments to members.
The PPF started on 6 April 2005 in response to public concern that when employers sponsoring defined benefit pension schemes became insolvent, scheme members could lose some or all of their pension if the scheme was underfunded. Besides offering compensation to those pension scheme members affected by insolvencies the Government hoped that the existence of the PPF would improve confidence in pension schemes generally.
The Board of the PPF has also taken over responsibility for managing the Fraud Compensation Fund, which will provide compensation to members of pension schemes who lose their entitlements due to Fraud. The PPF is chaired by Lady Barbara Judge CBE
.
All eligible schemes are required to pay annual levies to the PPF to contribute towards administration and the compensation Fund itself.
The PPF also offers a dependent's pension of half the member's entitlement.
In the period prior to payment pension increases at the lower of 5% per annum compound or the increase in the Retail Price Index. After retirement all pension relating to service after 5 April 1997 increases each year at 2.5% or the increase in the retail price index if lower; while all pension relating to service before 6 April 1997 will not increase.
Although the PPF is often billed as providing a guarantee to members' pensions, the amount of compensation is less than a member would have been entitled to under the rules of their original pension scheme. This is partly due to the compensation cap and 90% restriction on benefits but also because the indexation provided by the PPF may not be as generous as that otherwise provided by the scheme.
Furthermore, if at some point in the future the PPF has insufficient funds to pay benefits then the level of benefits or increases can be restricted. However, the levels of compensation are set in primary legislation, so changing these levels would require an Act of Parliament to do so.
In the first year of operation the PPF levy was a flat rate amount per member of the scheme.
After the first year of operation the levy is based on a scheme based element and a risk based element:
There is also an administration levy charged each year to provide for ongoing running costs.
The total PPF levy for 2006/7 was capped at 0.5% of the scheme's liabilities measured using the PPF's basis.
In the year from 6 April 2006 the administration levy is estimated to collect £15,000,000
The cap has been increased to 1.25% of the scheme's liabilities.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. It was created under the Pensions Act 2004
Pensions Act 2004
The Pensions Act 2004 is an Act of the Parliament of the United Kingdom to improve the running of pension schemes.-Background:In the years following the introduction of the Pensions Act 1995, it was widely perceived that it was failing to offer the protection to pension scheme members that had...
. The Board of the PPF is a Statutory Corporation
Statutory Corporation
A statutory corporation or public body is a corporation created by statute. While artificial legal personality is almost always the result of statutory intervention, a statutory corporation does not include corporations owned by shareholders whose legal personality derives from being registered...
responsible for managing the Fund and for making payments to members.
The PPF started on 6 April 2005 in response to public concern that when employers sponsoring defined benefit pension schemes became insolvent, scheme members could lose some or all of their pension if the scheme was underfunded. Besides offering compensation to those pension scheme members affected by insolvencies the Government hoped that the existence of the PPF would improve confidence in pension schemes generally.
The Board of the PPF has also taken over responsibility for managing the Fraud Compensation Fund, which will provide compensation to members of pension schemes who lose their entitlements due to Fraud. The PPF is chaired by Lady Barbara Judge CBE
CBE
CBE and C.B.E. are abbreviations for "Commander of the Order of the British Empire", a grade in the Order of the British Empire.Other uses include:* Chemical and Biochemical Engineering...
.
Eligible Schemes
Most defined benefit schemes, as well as the defined benefit portion of hybrid pension schemes based in the United Kingdom are eligible for protection. The exceptions include schemes that are covered by a crown guarantee.All eligible schemes are required to pay annual levies to the PPF to contribute towards administration and the compensation Fund itself.
Scheme Assessment
Before a scheme can enter the PPF it has to go through a period of assessment, which must last a minimum of one year. Entry to the assessment period is triggered by a qualifying insolvency event. During assessment a valuation is carried out of the scheme's assets and liabilities. If this valuation finds that the scheme can afford to purchase annuities for members at or above the level of compensation the PPF would provide, then the scheme leaves the PPF assessment to wind up independently. If the scheme cannot afford to purchase such benefits for its members, the assets of the scheme transfer into the Fund and the Board takes over responsibility for paying compensation to members.Compensation
The PPF pays two levels of compensation:- Any member who is over their normal retirement age or who retired early due to ill health will receive 100% of the pension they are currently receiving.
- Other members will receive the 90% level of compensation capped at a certain level. For the year from 1 April 2011, the cap is £33,219.36 per annum for members at age 65.
The PPF also offers a dependent's pension of half the member's entitlement.
In the period prior to payment pension increases at the lower of 5% per annum compound or the increase in the Retail Price Index. After retirement all pension relating to service after 5 April 1997 increases each year at 2.5% or the increase in the retail price index if lower; while all pension relating to service before 6 April 1997 will not increase.
Although the PPF is often billed as providing a guarantee to members' pensions, the amount of compensation is less than a member would have been entitled to under the rules of their original pension scheme. This is partly due to the compensation cap and 90% restriction on benefits but also because the indexation provided by the PPF may not be as generous as that otherwise provided by the scheme.
Furthermore, if at some point in the future the PPF has insufficient funds to pay benefits then the level of benefits or increases can be restricted. However, the levels of compensation are set in primary legislation, so changing these levels would require an Act of Parliament to do so.
Levies
The PPF is funded by levies on all eligible defined benefit schemes.In the first year of operation the PPF levy was a flat rate amount per member of the scheme.
After the first year of operation the levy is based on a scheme based element and a risk based element:
- 20% of the pension protection levy will be raised via the Scheme Levy.
- 80% of the pension protection levy will be raised via the risk-based levy. This levy depends on the level of underfunding in the scheme and the probability of the employer becoming insolvent over the following year. The probability of insolvency is estimated by Dun & Bradstreet.
There is also an administration levy charged each year to provide for ongoing running costs.
2005/6
In the PPF's first year it intended to raise £150m. However, the actual levy raised was about £138m.2006/7
For the year from 6 April 2006 the PPF intend to raise £575,000,000 via the pension protection levy. The scheme levy was set as 0.014% of the Scheme's liabilities.The total PPF levy for 2006/7 was capped at 0.5% of the scheme's liabilities measured using the PPF's basis.
In the year from 6 April 2006 the administration levy is estimated to collect £15,000,000
2007/8
For the 2007/2008 year the PPF intend to raise £675,000,000, compared to the £575,000,000 raised in 2006/2007.The cap has been increased to 1.25% of the scheme's liabilities.
External links
- The Pension Protection Fund website
- Association of Member-Directed Pension Schemes (AMPS) - The principal body for discussing changes involved in the area of pension planning.