If your former employer becomes insolvent, your defined benefit pension plan is at risk of going with it.
If the business no longer has enough money to uphold its pension commitments, the Pension Protection Fund (PPF) may step in to meet that commitment. But it isn’t always that straightforward.
What is the PPF?
The Pension Protection Fund (PPF) is an emergency fund that can provide help insolvent businesses meet their pension commitments. While set up by the government, the PPF is independent of it and raises funds through a compulsory levy on eligible pension schemes.
When a business becomes insolvent, the PPF may step in to take responsibility for the payment of eligible pensions.
However, the PPF can only step in under certain circumstances, and can’t protect every pension.
What pensions does the PPF protect?
The PPF can only step in to protect defined benefit pension plans, otherwise known as final salary and career average pensions.
Unlike defined contribution pensions, where employees and employers contribute to a pension plan over time, a defined benefit plan is effectively a promise from an employer to pay you a certain pension once you retire.
Typically, this is based on your final salary, how long you’ve worked for the company and the accrual rate — the proportion of your salary that you will receive as an annual pension.
These types of pension schemes are not seen often and are better suited to employees who work the majority of their careers in a single business — something that is fleetingly rare today.
You’re more likely to have a defined benefit plan if you work in the public sector.
While not classed as risky, with defined benefit pensions the onus falls on the employer to make sure there are the funds necessary to meet those commitments once workers start to retire.
And while rare, pension scandals such as with Sir Phillip Green and BHS go to show that such commitments aren’t always followed through.
How does the PPF work?
If an employer becomes insolvent and can’t meet its pension commitments, the PPF may step in and begin assessing the scheme to decide if it can offer its support.
While there are a few exceptions, the overwhelming majority of defined benefits and schemes with defined benefit elements are eligible.
The PPF will begin an assessment period, which can take up to two years, at the end of which it may take responsibility for the paying out of eligible pensions.
What is covered by the PPF?
The PPF is able to help current workers retain around 90 per cent of their expected pensions.
For already retired members, 100 per cent of their expected pensions will be paid, with the same applying to members on ill-health pensions and survivor’s pensions.
But the PPF is also limited in how much it can pay out. An upper cap, which is set by the government, limits the maximum figure that the PPF can pay out in a year. The cap as of March 2022 was £41,461.07.
Can you transfer out of the PPF?
If your defined benefits pension scheme has entered the PPF assessment period, it is generally not possible to transfer your pension.
This does mean that you are unlikely to be able to consolidate your pensions into a different scheme.
If your scheme has yet to enter an assessment period, you can continue with any transfers you wish.
Before deciding to transfer your pension, make sure to take on financial advice, as transferring a defined benefits scheme can often mean giving up some of your hard-earned benefits and being less protected by the PPF.
Can you take an early retirement with a PPF scheme?
You may be able to retire early if your original pension scheme allowed you to do so.
If the PPF is responsible for paying out your pension, you should contact the fund and ask for an early retirement quote.
The fund will then confirm whether or not you are eligible. If you are, you can then decide to apply for an early retirement. Otherwise, you will likely need to wait for your pensionable age.
If you had already retired and hadn’t reached the normal pensionable age for your scheme before your employer became insolvent, your payments from the PPF will be reduced. You will be paid 90 per cent of what you had been receiving, up to a cap.
How do I sign up for the Pension Protection Fund?
If the PPF takes responsibility for the paying out of your pension, you will be contacted and be helped every step of the way by the PPF’s representatives. Your primary contacts for all of your defined benefit pension queries will be the fund itself.
You will then be issued with a PPF reference number which you can use to sign up for the PPF’s online services.
You will be able to contact the fund directly through your online account, but if you would prefer to contact the PPF by phone, you can contact the fund at 0330 123 2222.
Alternatively, if you would prefer to contact the PPF by letter, you can find the address here.
Pension protection fund alternatives
The PPF was set up by the government in 2005. If you were a member of a defined benefit pension before this, you may be protected by the Financial Assistance Scheme (FAS).
The FAS is similar to the PPF, but its service varies slightly.
You may be protected by the FAS if:
Your employer became insolvent before 28 February 2006
Your pension scheme came to an end between 1 January 1997 and 5 April 2005
The pension scheme was unable to pay out the benefits to its members
FAS benefits are typically seen as compensation and are paid as a top up.
Overall, this scheme protects 90 per cent of a member’s expected pension, up to a cap of £36,901 in 2021/22.
It isn’t always easy to know where to start planning for your retirement.
If you need help figuring out your pensions and planning for your retirement, speak to a financial adviser today. Find your next adviser with Unbiased.