Pension Protection Fund

Pension Protection Fund












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Pension Protection Fund

The Pension Protection Fund (PPF) was established in 2005 by the Government and acts as a lifeboat fund for occupational defined benefit pension schemes, such as final salary schemes. It offers some protection of pension benefits to members of eligible salary-based schemes, should a sponsoring employer go bankrupt and leave the pension scheme with insufficient funds to cover its obligations to its members.

The PPF will not provide compensation to members of occupational defined contribution schemes , should their employer become insolvent.

In addition, the Pension Protection Fund is responsible for the Fraud Compensation Fund. This fund provides compensation to occupational pension schemes and their members that suffered due to an act of dishonesty. Most defined benefit and defined contribution occupational pension schemes are covered by the Fraud Compensation Fund.

How the PPF works

The Pension Protection Fund is an independently managed fund. The Fund raises money by charging annual levies on all eligible pension schemes. This money is used to cover the PPF’s administration costs and to create a compensation fund.

All companies offering a final salary scheme are eligible for protection under the PPF, except those that were closed (or had started to close) before April 2005. The PPF offers protection to around 7,800 eligible defined benefit pension schemes throughout the UK. These schemes -most of which offer final salary pensions – must be a member of the PPF and are required to pay it annual levies.

When it first started, the PPF charge a flat rate levy to all eligible schemes. However it now has two levies: the scheme-based levy and the risk-based levy. To establish the risk-based levy the PPF assesses whether a final salary scheme has a shortfall in funding against its obligations and the likelihood of the employer going bankrupt. Those most at risk of going under must pay the highest levies. The PPF also charges an annual administration levy.

If a company with an eligible scheme becomes insolvent they must contact the PPF. The company’s scheme then enters an assessment period during which time the PPF establishes whether the scheme is salvageable or whether it should enter the PPF. During this assessment period, members cannot join the scheme or make contributions. Generally, once a scheme enters the assessment period members cannot transfer their pension savings into another scheme.

If the PPF assumes responsibility of the pension scheme, it will take any assets in the scheme’s fund to help pay for the compensation.

How much compensation is given?

The amount of compensation given depends on an individual’s circumstances. Usually if they are a pensioner and were already receiving pension payments when their old employer became bankrupt their compensation will be 100%.

Those individual that are not yet retired will receive compensation of 90% of their pension entitlement. However this amount is capped each year and currently stands at £28,742.69 (as of April 2009). The compensation limit is re-evaluated each year to take in the cost of inflation (up to a maximum of 2.5%).

Members receiving compensation from the PPF can take some of their entitlement as a tax-free lump sum. If a member receiving compensation from the PPF dies, their spouse or partner is entitled to receive 50% of deceased’s compensation.

 

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