Expat Guide To The Pension Protection Fund

Protecting savings and investments

The Pension Protection Fund safeguards the pension rights of workers when their employer goes to the wall.

Often called the pensions lifeboat, the fund is a last resort for workers who otherwise lose their pensions when their firm goes bust.

But having a pension rescued does not mean all workers will pick up their promised pensions or other benefits in retirement.

This guide looks at the work of the Pension Protection Fund and how much you are likely to get from a workplace pension if your employer falls into administration.

Pension Protection Fund By Numbers

The PPF is tasked with protecting workers saving into defined-benefit pensions.

These are final salary pensions where savers are guaranteed a retirement income. The income is paid based on the length of service and someone’s salary when they retire.

The PPF steps in when an employer cannot fund the promises made to savers in a workplace pension scheme.

The PPF looks after 5,422 pensions – 3,617 are in the red and 1,805 in surplus.

The total deficit at the end of October 2020 was £168.2 billion, while the total deficit of schemes in the black was £279.5 billion.

Total assets added up to £1,753.4 billion against liabilities of £1,921.6 billion.

The PPF is funded by a levy on schemes under protection, assets from pensions under PPF protection, money recovered from insolvent employers and returns from investments.

The money generated pays retirement benefits to the 230,000 workers and retirees belonging to the protected schemes and 150,000 members belonging to the Financial Assistance Scheme (FAS).

The FAS looks after workplace pensions without funds to pay the pensions they promised that ended between 1997 and 2005 when the PPF started.

What Do Pensions Managed By The PPF Pay?

When the scheme goes into protection, the PPF assesses the scheme to see if the fund has enough to meet the employer’s pension promises.

In most cases, many employer funds do not have the cash to pay benefits at the same level as the PPF, so the PPF rescues them.

The PPF then pays compensation to members set by the Department of Work and Pensions and depending on their pension status:

  • If you had already retired at your normal pension age when the employer goes out of business, your pension benefits continue at the same level as before the scheme entered the PPF.

This also applies to those who have retired early due to ill health and those who have inherited pension payments

  • If you were below normal pension age or chosen to retire early when the scheme was taken over by the PPF, you will have your expected pension benefits cut by 10%
  • High-earners will also have a benefit cap imposed
  • Sometimes pensions are not uprated with annual cost of living increases, but pensionable service after 1997 rise by 2.5% a year

How Does The PPF Compensation Cap Work?

The PPF has a maximum compensation payment for members based on their salary and age.

The cap for a 60-year-old is £38,505 a year, but retirees do not receive that amount – the payment is 90% giving an annual pension of £34,655.

The PPF compensation calculation ignores any pension promises by an employer that come to above that amount.

The cap is reviewed each year, so compensation payments for high earners may change from year to year.

Commuting A PPF Pension

Commuting a pension means giving up compensation rights in return for receiving a lump sum.

Generally, this means taking income early as the lump sum and accepting reduced income payments from the fund in old age.

The lump-sum is up to 25% of the fund value tax-free.

How much each member gets depends on the PPF commutation factor and any provision for a spouse’s pension. The PPF commutation factor considers the member’s age on retirement.

Can savers transfer out?

No. Once your employer’s scheme enters the assessment period, transfers are frozen even if you want to consolidate your pot with other pensions or exercise your pension freedoms once you reach 55 years old.

The assessment period can last up to a year. During this time, the PPF manage creditor rights, but the scheme trustees continue to make the day-to-day administrative decisions and payments to retirees.

What happens if the PPF changes how inflation is measured?

The government has announced the measure of inflation for pensions will change by 2030.

The current measure used by the PPF is the Retail Price Index (RPI). This will change to the Consumer Price Index (CPI).

Generally, the RPI inflation number runs at about 1% higher than the CPI. This is due to including different factors, like the cost of housing, in the calculation.

The PPF has told the government that the switch will reduce the value of assets while pension liabilities will remain the same.

For retirement savers, this will mean lower fund values and cost-of-living increases over their lifetime, reducing total income paid.

Find Out More About The PPF

If you need more information about the PPF or your rights under a protected pension, visit the PPF website.

You can also

  • Call 0330 123 2222 (+44 20 8633 4902 from abroad)
  • Email [email protected]
  • Write to: PPF, PO Box 254, Wymondham NR18 8DN

Find Out More About The FAS

If you need more information about the PPF or your rights under a protected pension, visit the PPF website.

You can also

Pension Protection Fund FAQ

Pension savings are often the next biggest financial asset people have to the value of their home.

But as more big high street names tumble to the economic upset of the COVID-19 pandemic, tens of thousands of jobs are at risk.

The Pension Protection Fund rescues retirement savings, but the rules relating to payouts are more complicated than just taking over a fund.

Here are answers to some of the most asked questions about the Pension Protection Fund.

Does the government back the PPF financially?

No. Although Parliament set up the PF, the body is self-funding. Money to run and pay compensation comes from the levy on member schemes, investments, assets transferred into the PPF from failed schemes and cash recovered from schemes entering the PPF

Can I draw all my pension when I reach 55?

No. Pension schemes under PPF protection do not offer pension freedoms to withdraw all or some of your funds.

The PPF will offer an early retirement option from 55, but retirement savers must wait until their scheme’s normal retirement age. This is typically 60 or 65 years old.

Is my pension protected by the PPF if I divorce?

Ex-spouses can share PPF payments if the divorce providing a court makes a pension sharing order.

Does the PPF pay expats?

Yes, PPF rules do not consider where a member lives when making payments

What happens to my pension if I die?

If a PPF or FAS member dies, their pension can continue to pay:

● Children under 18
● Children under 23 who are in full-time education
● Disabled children
● Spouses or civil partners, providing the employer’s scheme rules, allow the payments

Is my defined contribution pension protected by the PPF?

In recent years, firms have closed their DB workplace schemes and open defined contribution (DC) schemes instead.

DC pensions rely on the value of their underlying funds and do not offer pension guarantees or other benefits available to DB savers.

The PPF does not protect DC pensions, only DB schemes.

This difference is a DB pension is a promise from an employer, but a DC pension has a value taken from the underlying fund. Therefore, if the employer faces financial difficulties, they may not be able to meet that promise.

That’s when the PPF steps in to assess if the fund can meet the promises made to members – and if not, the scheme is taken over by the PPF.

Which pensions are covered by the FAS and the PPF?

The FAS applies to schemes where sponsoring employers went bust between 1997 and April 2005.

The PPF looks after pensions where employers went to the wall after April 1, 2005.

Below is a list of some related articles, guides and insights that you may find of interest.

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