PPF compensation: assessment outcome and benefits offered
In last month's feature on the Pension Protection Fund we examined the levies, the PPF application process and the details of the assessment period. Here we look at the potential outcome of the application, the PPF's role once it has taken over a pension scheme and the levels of compensation paid out to members.
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As outlined in the first part of our feature on the Pension Protection Fund (PPF), a scheme needs to spend at least one year in the PPF "assessment period" before a decision is made about entry into the fund. If it is taken over by the PPF, the members are guaranteed compensation at prescribed levels. Although members do not necessarily receive the full benefits they were originally promised by their defined-benefit (DB) schemes, they are saved from potentially losing some, or all, of their pension.
Rejection by PPF
A PPF assessment period can end in one of two ways (see chart for details of the overall process). A "withdrawal event" can take place, in which case the PPF no longer has any responsibility for the scheme, or the PPF can issue a "transfer notice" and the scheme enters the PPF.
Any of the following are potential withdrawal events:
the pension scheme is "rescued" (that is, the scheme sponsor has been taken over by a company that is willing to assume responsibility for the pension scheme liabilities);
the valuation shows that the assets exceed the PPF level of liabilities;
the PPF Board decides that a scheme is not eligible (for instance, where it only became eligible in the three years prior to the assessment date, or was established during that period in order that members can receive PPF compensation) - in practice, this decision is likely to be taken at the outset; or
the insolvency practitioner's appointment ends at a time when the practitioner was unable to confirm whether a scheme rescue was likely to occur and, following that, no insolvency event occurred.
After a withdrawal event, the scheme either continues or winds up, but in both cases the PPF Board ceases to be involved. In this situation, the scheme must pay out any benefits that were due but not paid during the assessment period.
Reapplying to the PPF
If a scheme would have been eligible for the PPF but for the fact that it has enough assets to meet the liabilities protected by the PPF and a scheme rescue is not possible, the trustees must wind up the scheme. Where a scheme is required to be wound up, the trustees may apply to the PPF Board to request that it reconsider its refusal to accept responsibility for the scheme. In this instance, the trustees must supply the following, which must show that the scheme cannot provide at least the level of benefits protected by the PPF:
quotations from one or more insurers showing the cost of buying out either the protected liabilities, or the accrued DB rights of each member under the scheme; and
a set of auditor's accounts covering the period beginning with the date of the last audited accounts and ending on a date within the six months prior to the application date.
Where there are enough assets to secure PPF benefits, but the scheme is unable to obtain a buyout quotation (for example because the scheme is too big for any insurer to take it on), trustees must apply to the board for the scheme to continue as a closed scheme. Periodic valuations may be required of such closed schemes and if at any time the trustees become aware that the scheme assets are less than the PPF liabilities, they must apply to the board to assume responsibility for the scheme.
PPF entry
If the PPF takes over the scheme, it takes on all its assets and the liabilities for its members and the trustees are discharged from their responsibilities associated with administering the scheme. The PPF Board takes on the rights and powers of the trustees and continues as a creditor of the employer. Its key responsibility from this point is to ensure the payment of compensation to individual pension scheme members. Initially, it will make any necessary adjustments for reconciling any underpayments or overpayments of benefit during the assessment period.
Payments made by the PPF to pension scheme members are referred to as "compensation" payments. This reflects the underlying premise that the PPF compensates for potential losses, but does not purport to replace benefits that would have been received, pound for pound. It is worth noting that "in extreme circumstances" the PPF could reduce the current compensation amounts, which are set out in Schedule 7 to the Pensions Act 2004.
Payments (see table 1 for details) relate to benefits derived from DB schemes or the DB element of hybrid schemes. Any money-purchase benefits (such as additional voluntary contributions associated with a scheme taken over by the PPF, or the money-purchase element of a hybrid scheme) must be paid out in full by the PPF.
Compensation levels
In the case of individuals who have reached their scheme's normal pension age (NPA), or are in receipt of a survivor's pension or a pension on the grounds of ill health, the PPF will pay 100% of the pension already in payment immediately before the assessment date. This, however, is subject to a review of the scheme rules during the PPF assessment period (see part one of this feature).
Annual increases to pension payments for these individuals could potentially be lower than those that would have been provided by the scheme. The part of the compensation that is derived from pensionable service on or after 6 April 1997 will be increased in line with the retail prices index (RPI) capped at 2.5%. The compensation based on earlier service will not be increased.
For members below their scheme's NPA (active or deferred), the PPF will pay a 90% level of compensation. This also applies to pension credit members (those who benefited from a pension-sharing order on divorce) who have not yet reached their normal benefit age. This means they receive 90% of the pension they had accrued immediately before the assessment date (subject to a review of the scheme rules), plus revaluation in line with the increase in the RPI between the assessment date and the commencement of compensation payments. This is subject to a maximum increase for the whole period calculated by assuming RPI rose by 5% each year.
This 90% level of compensation is subject to an overall cap, which equates to £25,000 at age 65. The cap is adjusted according to the age at which compensation comes into payment (see table 2). If an individual has retired early, not on the grounds of ill health, any lump sum that has been paid out to that member will be taken into account when calculating whether or not the cap applies.
Compensation payments are increased by the lesser of RPI or 2.5%, on post-1997 service only (this being the same as the increases allowed for those in receipt of 100% compensation).
Lump sum and early retirement
Beneficiaries of PPF compensation can take up to 25% of the value of their initial PPF benefits in the form of a lump sum, irrespective of their entitlement under the scheme rules, provided they are not entitled to a separate lump sum. If members wish to commute their pension in this way, they must apply to the PPF Board within six months of entitlement arising or the transfer notice being issued by the board, whichever is the later. Where the value of the pension payments is £260 per year, or less, the board can allow 100% commutation of an individual's compensation on the grounds of triviality.
Non-pensioner members of schemes taken over by the PPF may opt to commence receiving PPF compensation before they reach their NPA, so long as they are aged 50 or over. In these circumstances, the compensation (both lump sum and pension) will be reduced by actuarial factors before it is then assessed against the reduced cap that applies at that age.
The factors that apply in calculating the benefit reduction in this situation are set out by the PPF in two tables - one showing the early retirement factors for the pension (reproduced in table 3) and the other for the lump sum. The latter applies to situations where the lump sum is a separate entitlement from pension under the scheme rules, rather than being derived by commuting pension. The factors depend on the individual's age when the pension commences and his or her NPA. They will be reviewed from time to time and "may be changed without notice". Both tables are available on the PPF website*.
Survivors' benefits
Where the admissible rules of the original scheme make provision for a spouse's pension, spouses' benefits (and civil partner benefits, where relevant) will be paid by the PPF. The periodic payments would amount to 50% of the member's total compensation, regardless of the level of benefit that would have been provided under the scheme rules. Similarly, if the scheme provided benefits for surviving unmarried partners, PPF benefits will be paid to an unmarried surviving partner - again at 50% of the member's total compensation.
Children will be entitled to dependants' pensions, regardless of whether they were entitled under the scheme rules, subject to certain conditions. However, the level of pension will depend on which other survivors and dependants are in receipt of PPF compensation. Survivors and dependants will not be entitled to take any of the benefit as a lump sum.
Complaints procedures
Some of the PPF Board's decisions will be challengeable and must be reviewed or reconsidered by the board. This may result in the board varying or revoking its decisions. It must also investigate complaints of maladministration in relation to its activities and may pay compensation where appropriate.
A PPF Ombudsman (the first is the current Pensions Ombudsman David Laverick) - who is appointed by the Secretary of State - will review any matter that the board is not able to resolve. He is able to decide what action the board should take as a result of investigation - for instance, he may require the PPF to make compensation payments or pay costs or expenses, where applicable.
A guidance document on the PPF's website (How we deal with your concerns, available via "Guidance" and "Complaints and Reviews") details how complaints can be lodged and includes a list of around 30 reviewable matters, which can also be found in Schedule 9 to the Pensions Act. An appeal can be made to the High Court against a decision of the ombudsman, but only on a point of law.
* www.pensionprotectionfund.org.uk via "Guidance" and "Early Retirement Factors".
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Existing pensioner Under normal circumstances, a 75-year-old pensioner who retired in 1995 and is now receiving a pension of £100 per week will continue to receive that amount as compensation from the PPF. Person yet to retire The compensation payable to those who have yet to reach the scheme's normal NPA is usually based on pensionable salary at the point pensionable service ends, the number of years in the scheme and the accrual rate of the scheme, increased to keep pace with inflation. If a 35-year-old active member was on a salary of £18,000 (the salary permitted by the PPF to calculate compensation) and had 10 years' pensionable service in the scheme at the time of the insolvency event, with an accrual rate of 1/60th, in simple terms his compensation would be calculated as follows: (Years of service/accrual rate) x salary = £X (10/60) x £18,000 = £3,000 (10 [years of service]/60 [accrual rate]) x £18,000 [salary] = £3,000 This person would be entitled to compensation of 90% of £3,000 per year. This equates to £2,700 per year. This would be revalued from the time of the insolvency event to NPA in line with the RPI capped at 5%. Any compensation derived from pensionable service on and after 6 April 1997 will then be increased each year in line with the RPI, capped at 2.5%. Source: Pension
Protection Fund. |
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This feature draws on a reading of the Pensions Act
2004, the accompanying explanatory notes, and the Regulations and notes
associated with the PPF.We have also used the information and guidance
provided by the PPF on its website, articles in PMI News, Watson Wyatt's factsheets on the new pensions framework and
CMS Cameron McKenna's plain English guide to the Pensions Act. We used the
briefing on the Pensions Act produced by Freshfields Bruckhaus Deringer to help us formulate our table on PPF
compensation (table 1). |
TABLE 1: COMPENSATION PAYABLE BY THE PPF
|
Member status immediately before assessment date |
Percentage of scheme benefits paid by PPF (based on benefits accrued on assessment date) |
Does compensation cap apply? |
Annual increases to benefits in payment |
|
Reached NPA, or pension credit member who has reached normal benefit age. |
100% |
No |
Lesser of RPI and 2.5% on post-1997 service only. |
|
Retired on ill-health grounds (regardless of age). |
100% |
No |
Lesser of RPI and 2.5% on post-1997 service only. |
|
In receipt of pension, but below NPA, or pension credit member below normal benefit age. |
90% |
Yes (subject to actuarial reduction if taken before age 65) |
Lesser of RPI and 2.5% on post-1997 service only. |
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Active and deferred members below NPA and pension credit member below normal benefit age. |
90% at NPA (subject to actuarial reduction if taken before NPA) |
Yes (subject to an actuarial reduction if taken before age 65) |
Lesser of RPI and 2.5% on post-1997 service only. |
TABLE 2: ACTUARIAL FACTORS FOR CALCULATING PPF COMPENSATION CAP
Note that the derived cap is not the same as the compensation payable, which is 90% of this amount (eg £25,000 at age 65).
|
Age last birthday |
Factor |
Derived cap (£) |
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50 |
0.71 |
19,722.22 |
|
51 |
0.73 |
20,277.78 |
|
52 |
0.74 |
20,555.56 |
|
53 |
0.75 |
20,833.34 |
|
54 |
0.77 |
21,388.89 |
|
55 |
0.78 |
21,666.67 |
|
56 |
0.80 |
22,222.22 |
|
57 |
0.82 |
22,777.78 |
|
58 |
0.84 |
23,333.34 |
|
59 |
0.86 |
23,888.89 |
|
60 |
0.88 |
24,444.45 |
|
61 |
0.90 |
25,000.00 |
|
62 |
0.92 |
25,555.56 |
|
63 |
0.95 |
26,388.89 |
|
64 |
0.97 |
26,944.45 |
|
65 |
1.00 |
27,777.78 |
|
66 |
1.03 |
28,611.11 |
|
67 |
1.06 |
29,444.45 |
|
68 |
1.10 |
30,555.56 |
|
69 |
1.13 |
31,388.89 |
|
70 |
1.17 |
32,500.00 |
|
71 |
1.21 |
33,611.11 |
|
72 |
1.26 |
35,000.00 |
|
73 |
1.30 |
36,111.11 |
|
74 |
1.36 |
37,777.78 |
|
75 |
1.41 |
39,166.67 |
Source: Pension Protection Fund.
TABLE 3a: EARLY RETIREMENT FACTORS - PENSION
|
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Normal pension age | ||||||
|
Age at retirement |
65 |
64 |
63 |
62 |
61 |
60 |
59 |
|
50 |
0.492 |
0.519 |
0.547 |
0.576 |
0.605 |
0.636 |
0.667 |
|
51 |
0.514 |
0.542 |
0.571 |
0.600 |
0.631 |
0.663 |
0.696 |
|
52 |
0.536 |
0.565 |
0.596 |
0.627 |
0.659 |
0.692 |
0.727 |
|
53 |
0.560 |
0.591 |
0.622 |
0.655 |
0.688 |
0.723 |
0.759 |
|
54 |
0.586 |
0.617 |
0.650 |
0.684 |
0.720 |
0.756 |
0.794 |
|
55 |
0.612 |
0.646 |
0.680 |
0.716 |
0.753 |
0.791 |
0.830 |
|
56 |
0.641 |
0.676 |
0.712 |
0.749 |
0.788 |
0.828 |
0.869 |
|
57 |
0.671 |
0.708 |
0.745 |
0.784 |
0.825 |
0.867 |
0.910 |
|
58 |
0.703 |
0.742 |
0.781 |
0.822 |
0.865 |
0.908 |
0.953 |
|
59 |
0.738 |
0.778 |
0.819 |
0.862 |
0.907 |
0.953 |
1.000 |
|
60 |
0.774 |
0.817 |
0.860 |
0.905 |
0.952 |
1.000 |
|
|
61 |
0.814 |
0.858 |
0.904 |
0.951 |
1.000 |
|
|
|
62 |
0.856 |
0.902 |
0.950 |
1.000 |
|
|
|
|
63 |
0.900 |
0.949 |
1.000 |
|
|
|
|
|
64 |
0.948 |
1.000 |
|
|
|
|
|
|
65 |
1.000 |
|
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|
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TABLE 3b: EARLY RETIREMENT FACTORS - PENSION
|
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Normal pension age | |||||||
|
Age at retirement |
58 |
57 |
56 |
55 |
54 |
53 |
52 |
51 |
|
50 |
0.700 |
0.734 |
0.768 |
0.804 |
0.841 |
0.879 |
0.918 |
0.958 |
|
51 |
0.730 |
0.765 |
0.802 |
0.839 |
0.877 |
0.917 |
0.958 |
1.000 |
|
52 |
0.762 |
0.799 |
0.837 |
0.876 |
0.916 |
0.957 |
1.000 |
|
|
53 |
0.796 |
0.835 |
0.874 |
0.915 |
0.957 |
1.000 |
|
|
|
54 |
0.832 |
0.872 |
0.914 |
0.956 |
1.000 |
|
|
|
|
55 |
0.871 |
0.912 |
0.956 |
1.000 |
|
|
|
|
|
56 |
0.911 |
0.955 |
1.000 |
|
|
|
|
|
|
57 |
0.954 |
1.000 |
|
|
|
|
|
|
|
58 |
1.000 |
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
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65 |
|
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Note: Factors should be applied to the deferred pension. Age should be determined in complete years and months rounded up, and factors for intermediate ages should be obtained by linear interpolation.
Source: Pension Protection Fund.
