Planning for retirement involves more than just saving money, it’s also about ensuring those savings are protected. For many people with defined benefit pension schemes, there’s a lingering question, what happens if the employer involved in the scheme can no longer pay out? That’s where the Pension Protection Fund (PPF) comes in.
In this article, we explain what the Pension Protection Fund is, how it works and why it could be crucial to your retirement plans.
Understanding the Pension Protection Fund
The Pension Protection Fund (PPF) is a UK-based public corporation that was established in 2005 under the Pensions Act 2004. Its primary purpose is to compensate individuals of the defined benefit pension schemes when the employer can no longer meet its obligations. This could be due to a number of reasons, such as administration or financial difficulties.
A defined benefit scheme is a type of workplace pension that guarantees a fixed income for life when you enter retirement. The amount you receive is typically based on your final salary or career average and the years you’ve worked for the employer. The schemes are generous as they offer a predictable, stable income throughout your retirement years. However, they are costly, which explains why many employers have opted out in return for defined contribution schemes.
Because of their long-term promises, defined benefit schemes can pose a risk
to members if the sponsoring employer fails. If a company goes under and
can’t meet its pension commitments, the Pension Protection Fund is a
vital safety net for its members.
“Our purpose is to protect people’s futures, providing security in retirement for our members and millions of people throughout the UK who belong to defined benefit (DB) pension schemes.“
How Does the Pension Protection Fund Work?
When a company that sponsors a defined benefit pension scheme becomes insolvent and can no longer support the pension, the Pension Protection Fund (PPF) may step in to protect the scheme’s members. But how exactly does the PPF manage to pay out compensation?
When does the money from?
A Levy on Pension Schemes – Every year, eligible defined benefit pension schemes in the UK pay a levy (type of annual fee).
Recoveries from Insolvent Employers – If an employer goes bust and owes money to the scheme, the Pension Protection Fund works to recover funds via legal and financial processes.
Investment Returns – The PPF manages billions in assets and invests them strategically to generate income.
Transferred Assets – When a pension scheme enters the PPF any money or investments it still holds are passed to the PPF and are managed as part of their portfolio.
What happens when a pension scheme enters the PPF?
Once a pension scheme is referred to the Pension Protection Fund, a detailed assessment process begins. The PPF checks whether the scheme has enough money to pay at least what the PPF would provide in compensation. If not, the scheme officially enters the PPF.
At which:
- The Pension Protection Fund takes over responsibility for paying pensions to members
- Members receive compensation in place of their original scheme benefits
- In the majority of cases, receiving a percentage of their expected pension up to a cap
You will be continually informed and the transition will be as seamless as possible to reduce stress and maintain clarity throughout.
What Compensation Does the PPF Provide?
The compensation offered to you by the fund depends on your status at the time the scheme enters:
- Retired members who are already receiving a pension will typically get 100% of their pension
- Non-retired members typically receive 90%, subject to a cap
*It’s worth noting that while the PPF ensures a substantial portion of your pension is protected, it may not replicate the full benefits originally promised by your scheme.
Who is Eligible?
Not all pension schemes are eligible for the Pension Protection Fund. It only covers defined benefit schemes registered in the UK and not backed by a solvent employer. Defined contribution pensions, more common in modern workplace pension arrangements, are not covered by the PPF. Instead, these are typically protected by the Financial Services Compensation Scheme (FSCS).
Why the Pension Protection Fund Matters
With the shifting landscape of pensions and increasing employer insolvencies, the Pension Protection Fund plays a critical role in maintaining confidence in the UK’s pension system. It provides peace of mind to millions of workers and retirees, knowing their pensions are safeguarded even in worst-case scenarios.
For those approaching retirement, understanding how the Pension Protection Fund works, and whether your scheme is covered, can form an essential part of your financial planning.
While no one likes to think about what might happen if their employer goes bust, being informed about the Pension Protection Fund can help you make better decisions for your retirement. Whether you’re already receiving a defined benefit pension or still working and building one up, the PPF could be an essential backstop for your future income.
If you’re unsure about the security of your pension, or whether your scheme would be covered by the Pension Protection Fund, our team of independent financial advisers can help. At My Pension Expert, we’ll guide you through your options, explain how protections like the PPF work, and support you in building a clear plan for the future.
With the right advice, you can feel confident that your retirement income is protected – whatever happens.
