Pension Protection Fund

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 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.

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 6 April 2006 to 5 April 2007 the cap is £26,050 per annum for members at age 65.

The PPF also offers a dependent's pension of half the member's entitlement.

Each year prior to payment pension increases at 5% or the Retail Price Index if lower. After retirement all pension relating to service after 5 April 1997 increases at 2.5% per annum or 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 often less than a member would have been entitled to under the rules of their original pension scheme. This is because the PPF will not provide indexation on any pension rights accrued before 1997.

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. The levy is made up of two parts:

• 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.

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 The cap has been increased to 1.25% of the scheme's liabilities.

See also

• Pension Benefit Guaranty Corporation - The equivalent body in the United States

External links

• Pensions Protection Fund website