Kirk Rice Blog

Pension Protection Fund (PPF) – Is My Final Salary Pension At Risk?Written on October 1, 2019 by Kirk Rice LLP

The Question:

The recent news that Thomas Cook has entered administration has raised concern over the impact a company failure like this has on the pension scheme. I have 2 preserved final salary pensions; neither are with Thomas Cook but they are with employers in the travel industry.

The Thomas Cook failure is too close to home and made me question the impact this would have for me if one or both of my previous employers were to fail.

Kirk Rice LLP answers:

Final salary pension schemes, or defined benefit pensions as they are also called, are by far the best type of pension to have. They provide pre-determined benefits that are underwritten by the employer and are in effect guaranteed. The amount of pension will depend on several factors, such as the scheme’s accrual rate; 1/60th is an example.  This means for each year you are in the scheme you accrue 1/60th of your final salary as a pension. If you worked for a company for 30 years, you would have accrued 30/60ths or 50% of your final salary as a pension.

There are other factors such as definitions of pensionable & final salary, all of which can vary from scheme to scheme. I wrote earlier on that the eventual pension is in effect guaranteed, but this is not strictly true as it depends on the employer remaining solvent and/or the pension scheme itself being sufficiently funded. An employer, such as Thomas Cook, could fail but if the pension is sufficiently funded it is unlikely there would be an impact to the pension and its members.

If, however, the scheme was not sufficiently funded there would be an issue. There is however a safety net in the form of the Pension Protection Fund (PPF). This was set up specifically to protect members from a corporate failure and where the pension is not sufficiently funded. The PPF is a very good scheme, but the protection it provides generally means your pension will be at a lower level. Some main points are as follows.

What is a Pension Protection Fund?

If an employer becomes insolvent owing money to the pension scheme the Pension Protection Fund may take over the running of the Scheme.

This is designed to ensure that anyone already receiving benefits from the Scheme is broadly unaffected. If members are over the normal pension age of the scheme, or are in receipt of a spouses, dependants or ill health pension they will receive 100 per cent of the pension in payment when the company entered insolvency.

If a member is an early retiree or under the normal pension age of the scheme, they will receive 90 per cent of what they were promised.

PPF compensation is almost always substantially more than members would have received if they simply received a share of what was left in their scheme when their company became insolvent.

However annual increases to any pensions will normally be lower than the Scheme promised. Benefits accrued before April 1997 will not increase in payment. Benefits accrued after that increase in payment then at a maximum of 2.5%pa.

Once the PPF starts assessing a Scheme you cannot transfer out. The assessment period may be 2 years and sometimes the Scheme can stay out of the PPF and your right to transfer is restored subject to any Scheme restrictions. Once a scheme is in the PPF you cannot transfer your rights out. The PPF works by pooling all the assets of schemes and managing these investments at a lower cost than the schemes’.

If you are over the scheme retirement age on the day before the assessment date for entering the PPF

Your pension will not be reduced regardless of whether it is being paid or not. However, any pension accrued prior to the 5, April 1997 will no longer increase each year. Any pension accrued after this date will increase by CPI up to a maximum of 2.50%. This is likely to be lower than the increases the pension was paying. The spouse’s pension will be 50% of the pension being paid.

This is likely to be a reduction as many schemes provide a spouse’s pension based on the pension that would have been payable had no pension commencement lump sum (PCLS, formerly tax-free cash) been taken at retirement. Some will even pay 66.00%.  This could be a significant reduction.

If you are under the scheme retirement age on the day before assessment date for entering the PPF

You will receive 90% of your pension this is however subject to a compensation cap. At age 65, it is £36,018, at 60 it is £30,857 and age 55 it is £27,062 (based on 90%). It will also affect ages in between e.g. at age 64 it will be lower than £36,018. If you have over 21 years of membership in the scheme, the cap will increase by 3.00% for every full year of service over 20 years.

Prior to retirement, the pension will be increased (revalued) by CPI up to a maximum of 5.00% pa. Many final salary pensions will include a guaranteed minimum pension (GMP) through being contracted out of SERPS/S2P. The rate of revaluation under the PPF is lower than the rate of revaluation normally applied to GMP accrued after April 1988.

The spouse’s pension would be 50% of the pension being paid. Any pension accrued prior to the 5, April 1997 will not increase each year. Any pension accrued after this date will increase by CPI up to a maximum of 2.50%. This is likely to be lower than the increases the pension was paying.

Clearly the failure of a company like Thomas Cook can have a significant impact on its employees and of course its customers. There is also an impact to the pension, but thanks to the Pension Protection Fund the result is not ruin. Yes, your pension would be reduced and affected in the ways I mention. You could also see a significant reduction if your pension is over the compensation cap. Overall though, the PPF does a good job of protecting people’s pensions at a very difficult time.

More information about the PPF can be found here 

Any reader interested in getting some help considering the Pension Protection Fund (PPF), should email info@kirkrice.co.uk to arrange a call with one of our financial planners.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. The FCA does not regulate tax and trust advice.