With the Pension Protection Fund (PPF) not given the credit it deserves in recent years following the collapse of Carillion, BHS and Toys R Us to name a few, I think it’s high time we highlighted its effectiveness.
Before the introduction of the PPF in 2006, if a sponsoring employer of a defined benefit (DB) scheme became insolvent and the scheme was poorly funded, members of the DB scheme could face losing nearly all of their pension. This was the case with Allied Steel and Wire in 2002 where more than 1,000 employees lost up to 80% of their pension. It was this failure, along with other similar situations, that instigated the formation of the PPF with the aim of providing a good level of protection for all members of DB pension schemes.
The PPF is funded by a levy on all employers that have a DB scheme. This levy is a combination of how strong the employer is and how well funded the employer’s DB scheme is. For a strong employer with a relatively well funded scheme, the levy will be small to reflect the fact that the scheme is unlikely to enter the PPF, and vice versa.
For individuals whose scheme goes into the PPF, those currently in receipt of a pension and who are above the scheme’s normal retirement age (usually age 65), have retired due to ill health or are receiving a dependant’s pension following the death of a member, get 100% of their entitlement. Most others will get 90% of their entitlement, although anyone entitled to a larger pension, will see a further reduction.
Future increases to the compensation pension will generally be lower than members were expecting from their scheme, but in most cases there will be some level of inflation protection.
Ultimately, the PPF has provided much better protection than was in place prior to its existence – yet this is generally forgotten by the media when reporting on stories such as Carillion and Toys R Us. The lifeboat organisation has actually had a strong year with invested assets at £28.7billion – up £5billion on the previous year.
In an ideal world we want all employers to remain solvent and for DB schemes to be very well funded so the PPF is not called upon. However, we are in the real world and this isn’t the case, so it is crucial to have the support of the PPF providing a secure safety net for those individuals who are lucky enough to be members of DB schemes.
Stuart Price, Partner and Actuary at Quantum