The Pension Protection Fund: A True Lifeboat in Stormy Times
Those studying for the CII R04 and AF7 exam will need a thorough understanding of the Pension Protection Fund (PPF). In this article we look at how important the protection offered by the PPF is to members of defined benefit pension schemes.
This article is correct as at 9 October 2023.
The value of the PPF was highlighted again recently following the failure of Wilko. The discount home and grocery store fell into administration earlier in the year with debts of approximately £625m. This included a deficit of £50m for its pension fund on a buy-out basis. The worrying thing here is that the fund had been closed since 2013. A report by the administrators, Price Waterhouse Coopers, tells us that the actual level of debt was nearer £70m, however, this was alleviated by £20m worth of security of the business’s assets.
There has been some heated debate over the levels of dividends paid out to shareholders in that time and the ethics of the business being permitted to do so. However, it is an all-too-familiar story, particularly where retail businesses are concerned. Other recent high-profile casualties have included the 243-year-old Debenhams chain.
A worrying trend
Figures published for July 2023 revealed that 248 compulsory liquidations had been recorded that month, up 81% on a year earlier. Unfortunately, a combination of the Covid-19 pandemic, the energy crisis, high inflation and interest rate increases have rendered many previously profitable businesses unviable and the trend is likely to continue for some time yet.
For those faced with a significant loss of part of their defined benefit entitlement, the PPF can be invaluable. Following the judgement in Hughes vs the Board of the PPF, the scheme now provides protection of 100% of the value of the pension where the member had reached normal retirement date at the time of entry into the PPF. Where the member had not done so then the protected value is 90%.
Crucially for the latter group, the Hughes judgement means that there is now no upper limit to the protection. This is excellent news for that (admittedly now vanishingly small) group of people with defined benefit entitlements which exceeded the previous cap of £41,461.07 per annum.
There are, however, some limits to the protection employees can expect should their scheme be taken into the PPF:
- Indexation in payment is limited to CPI capped at 2.5% for post-April 1997 service (none for pre-1997), which does not help in the current high-inflation environment.
- Revaluation prior to payment is limited to CPI capped at 5% for pre-April 2009 and 2.5% for post-2009 service.
- Spouse’s pensions limited to 50% of the member benefits.
- Children’s pensions limited to 25% if one qualifying child or a maximum of 50% in total if more than one.
- The pension commencement lump sum is calculated using PPF commutation factors and not scheme ones.
- Members are not usually permitted to transfer out of the scheme once it has entered an assessment period.
Interestingly, the Financial Assistance Scheme (FAS) which was the predecessor to the PPF is not treated by the same rules. Its benefits are still capped at £41,888 per annum. The reason for this is its cap applied to all members equally and was therefore not impacted by the Hughes judgement, which was based on age discrimination.
The PPF is essential learning for anyone studying for R04 and AF7.
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