Is the Pension Protection Fund Working?

With the potential transfer of the Carillion pension schemes to the Pension Protection Fund (PPF), the PPF has been much in the news recently. Below Philip Woolham, Senior Associate at Bevan Brittan LLP, explains the ins and outs of the fund, touching on some of the challenges faced.

The PPF is an important part of the UK pension landscape, providing significant protection to scheme members. But its existence comes at a cost to occupational pension schemes and their sponsoring employers if they provide defined (final salary-type) benefits. It is not involved with public sector pension schemes.

As well as taking assets from schemes that transfer to it, pension schemes that could enter the PPF themselves pay a levy to support it. Part of the levy is calculated on the likelihood of the scheme actually falling into the PPF because their employer fails – the argument is that greater risk of entry should be reflected in a larger contribution.

The PPF does not always provide ‘like for like’ benefits for members whose schemes transfer to it. If they have not reached normal retirement age, whether or not they have actually started to draw benefits (for example by retiring early), reductions are imposed, to 90% of what was originally promised. There is an additional cap on all benefits of £38,505.61 (£39,006.18 from April 2018). If the 90% limit also applies then £35,105.56 is the maximum currently payable. So it is possible for people who are already drawing a pension to have their benefits reduced if their scheme enters the PPF. Increases to take account of inflation may also be reduced, amongst other possible changes depending on what the original scheme promised.

This is designed to strike a balance between giving members a reasonable level of pension security and trying to restrain the very high costs of doing so. Transferring schemes’ assets will usually not provide anywhere near enough to cover the liabilities, so the limit and cap aim to reduce the amount required from investment growth and scheme levy

There was however a successful legal challenge a few years ago, in which it was decided that for some pension scheme members, especially those with long service, the cap meant that their benefits were not reasonably protected. So the PPF now allows additional payments for those with long service.

From time to time, the PPF must absorb larger schemes. It may take on £900m of extra liabilities when and if the Carillion schemes transfer (the exact amount is still to be confirmed). While it currently has generous reserves, the PPF has a statutory duty to provide the promised benefits to all members of schemes that transfer, even if big schemes continue to impose additional liabilities. And there is a limit to the amount it can levy from solvent schemes before the costs become yet another strain on their resources, and their sponsoring employers’, potentially increasing the chances of their also heading towards the PPF.

The Pensions Regulator also works with the PPF in these processes. It has a statutory duty to protect the PPF, by preventing schemes falling into the PPF if at all possible, and also acts as an overseer, able to veto agreements if it feels that it they are not in the longer-term interests of the PPF. This happened a few years ago with Readers Digest, when it vetoed a deal already agreed between the employer and the PPF which would have allowed the scheme to pass to the PPF and the employer to restructure itself. In some cases, however, the Regulator agrees that the transfer can take place, including recently for the British Steel pension scheme.

The PPF is not perfect. Its levy imposes an additional cost on often hard-pressed pension schemes, and it does not replicate all benefits for all members whose pension schemes transfer. Not all of the deals it makes, along with the Regulator, work out as expected, for example when Monarch Airlines collapsed even after it was restructured and its pension scheme passed to the PPF.

However, the PPF provides a significant measure of security for pension scheme members who have often saved for much or all of their working lives into their pension schemes. While it will undoubtedly face further challenges in the future, including no doubt more large-scale insolvencies that mean more liabilities pass to it, its continued existence is surely worthwhile.

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