It is estimated by the Pension Protection Fund (PPF) that the overall shortfall in UK final salary pension schemes exceeds £100bn. With many large companies’ final salary pension schemes currently under assessment by the PPF, many people are concerned about how secure the pension promise is from their current or former employers.
Many people took comfort from the Government’s launch of the PPF with effect from 6 April 2005. However some are realising too late that for those with long service or significant benefits the protection offered represents only a fraction of the pension they were expecting.
What protection is provided by the PPF?
PPF benefits depend upon whether you have reached the normal retirement date of the scheme and are in receipt of a pension or if you are still to draw your benefits. If the PPF accepts responsibility for a scheme, compensation will be paid as follows.
- For those with pensions in payment after the scheme’s normal retirement age, 100% of the pension paid could be protected, however, future increases in pension may be affected.
- For those members who took early retirement before the scheme’s normal retirement age and who have not yet attained the schemes normal retirement age the situation is more complex. The compensation will be restricted to 90% of their standard entitlement and the maximum pension will be limited by the PPF to £26,050.This may be further reduced by actuarial factors issued by the PPF even if early retirement without penalty had been offered by the main scheme.
- For those members not yet in receipt of pension, compensation benefits are limited to 90% of the entitlement, subject to the current £26,050 limit. Further details concerning these benefits can be found on the PPF website www.pensionprotectionfund.org.uk.
For people who have not yet taken pensions the 90% compensation limit has received a lot of publicity however we are not certain that the £26,050 cap on benefits paid has received the same amount of publicity.
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Example Ivor is 56-years-old and has a deferred pension entitlement with his past employer of £74,088 at age 65. This pension would be subject to annual statutory increases in deferment until the scheme’s normal retirement age of 65. Ivor could realistically expect a pension of £93,974 at age 65 as the scheme rules allow for the pension to increase in line with the Retail Price Index subject to amaximum of 5% per annum. If, however, the scheme became subject to the PPF rules the likely pension at age 65 would reduce to £35,583 (90% of the limit of £26,050 revalued to age 65). Furthermore, only the pension earned post April 1997 would increase in payment. Ivor would find that, rather than 90% of his pension entitlement being protected by the PPF, only 38% is covered by compensation. The loss of pension of over £58,000 per annum plus increases in payment would be actuarially capitalised at a value of over £1.3m. Source: O&M Systems |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
