The Pensions Protection Fund

In Defined Benefit by Wealth of Advice

The Pensions Protection Fund

The Pensions Protection Fund (PPF) was set up in April 2005 to protect members who had defined benefits (i.e. final salary type benefits) in a workplace pension scheme. It is funded by a general levy on occupational salary-related schemes.

Where an employer becomes insolvent and the pension scheme couldn’t afford to pay those benefits promised to members on wind up, the pension scheme can apply for PPF compensation if they meet the PPF rules.

To meet the PPF rules, there must be insufficient pension scheme assets to meet at least the level of benefits that the PPF will provide. When a pension scheme applies to the PPF for compensation, this period is known as the ‘assessment period’.

  • Members who have reached their scheme’s normal pension age and have already retired will generally receive the same amount in compensation as the pension they were receiving from their scheme at the time their employer went bust.
  • The PPF will also generally pay 100 per cent compensation to those who have retired on legitimate ill-health grounds, regardless of age, and those receiving a pension in relation to someone who had died at the time that the employer went bust.
  • Compensation payments will rise in line with inflation each year, subject to a maximum of 2.5 per cent. But this will only relate to pensionable service dating from 5 April 1997.
  • Payments relating to pensionable service before that date will not increase.
  • Those members who have not yet retired will receive up to 90 per cent compensation on reaching the normal pension age of their scheme.
  • Members who have retired but have not reached their normal pension age will also receive up to 90 per cent compensation.
  • These 90 per cent calculations are subject to a cap which is recalculated every year, the cap is currently £37,420.42 (£33,678.38 when the 90 per cent level is applied).

For example, if you were set to receive £25,000 a year from a defined benefit pension scheme and your employer became insolvent and the fund folded to the PPF, you would receive just £22,500 of your pension fund.

For more information on the Pensions Protection Fund, talk to us today.

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