The Pension Protection fund (PPF), which came into effect on the 6th of April 2005, is an insurance scheme designed to protect members of defined benefit and hybrid pension schemes. So far, around 900 pension schemes, with more than 235,000 members, have transferred to the Pension Protection fund.
The PPF is run by the PPF Board, which is independent of the Pensions Regulator and is funded by three levies;
an administration levy,
a fraud compensation levy and,
a Pension Protection levy.
The Pension Protection levy has two components,
a scheme based levy and,
a risk based levy.
Once the PPF has assumed responsibility for a pension scheme it will take over the schemes remaining assets and use these to help fund the compensation it pays.
The Pension Protection fund currently has over £28 billion in assets and has a funding level of 121%.
Entering the Pension Protection fund
The PPF may pay compensation where;
an employer with a UK based defined benefit or hybrid occupational pension scheme becomes insolvent and the scheme is underfunded, or
the funds of a defined benefit or hybrid scheme have been misappropriated through fraud.
If the PPF is to take responsibility for a scheme a number of requirements must be met, in particular;
the scheme must not be a money purchase scheme it must not have commenced wind up before the 6th of April 2005
an insolvency event must have occurred in relation to the scheme's employer, which is a qualifying insolvency event, eg an insolvency practitioner has notified the board that the employer sponsoring the scheme is in administration
there must be no chance that the scheme can be rescued, and
there must be insufficient assets in the scheme to secure benefits on wind up that are at least equal to the compensation that the PPF would pay if it assumed responsibility for the scheme.
A prescribed insolvency event occurs
The insolvency event starts an assessment, during which the scheme is considered to see if it meets the criteria for entry into the PPF. The PPF aims to complete this within two years. During the assessment., the trustees remain in day-to-day control of the scheme, however;
no new members can be admitted, no further benefits earned and no transfer values paid
benefits can be paid under the scheme but only to the level of PPF compensation,
the PPF can intervene in the management of the scheme and give directions to the trustees,
the PPF will review any moral hazard issues,
the PPF will also review any recent (typically within the three years prior to the assessment date) rule changes, ill health early retirements and discretionary issues granted lead to an increase in PPF compensation, and
the PPF will instruct the scheme actuary to carry out an actuarial valuation as at the day before the assessment. Started (a section 143 valuation).
Transfers out within the assessment and once the scheme enters the PPF
In most cases, once a scheme is in the assessment. The trustees are not in a position to payout any transfer values. There may be an exception to this where the member,
requested and accepted the transfer value in writing before the assessment date (and also within the time scale set by the trustees in order that the CETV quoted is still valid), and
has a designated a scheme willing to accept the transfer value (i.e. have completed all paperwork required by the scheme the funds are to be transferred to and have submitted these).
In these cases the trustees may only pay the transfer value if;
they are satisfied that they can still meet their objective of ensuring that protected liabilities do not exceed assets( or that where they do, the excess is kept to a minimum), and
they reduced the transfer payment to ensure that it does not exceed the cost of securing the benefits that would be payable if the PPF were to assume responsibility.
Once the PPF has assumed responsibility for the scheme, a member is not entitled to a transfer payment, unless their pensionable service was ended by the start of the assessment, and they had less than three months pensionable service in the scheme.
Pension Protection Fund Compensation Levels
Where the PPF takes over a scheme it provides the following levels of compensation.
Members who have already reached the schemes normal retirement age when the employer suffers an insolvency event = 100% of the benefit is provided.
Members already in receipt of a survivor's benefit at the point the employer suffers an insolvency event = 100% of the benefit is provided.
Members who have retired but have yet to reach the scheme's normal retirement age when the employer suffers an insolvency event = 90% of the benefit is provided, subject to an overall cap of £38,000.
Deferred members who have not reached the schemes normal retirement age when the employer suffers an insolvency event equals 90% of the benefit is provided, subject to an overall cap of £38,000.