The U.K. Pension Protection Fund: What to expect

By Hal Wightman

In 2005, the U.K. government set up a fund designed to protect defined benefit pensions which are forced into wind up proceedings. The Pension Protection Fund (and the related Financial Assistance Scheme) delivers most or all of member's future pension payments in contexts where their scheme is insolvent and underfunded. PPF transfer is a way of ensuring the financial future of contributing members and maintaining a wider confidence in the effectiveness of pensions across society.

Essential details

The PPF covers pensions which were free from wind up (or a triggering insolvency event) at the date the fund became operational on 6 April, 2005. The FAS covers schemes which entered wind up before 6 April, 2005, right back to 1 January, 1997. Levels of compensation offered by the PPF cover 90 to 100 percent of payments, based on a number of factors, including retirement age and health status. There is an annual compensation cap for PPF pensions - which currently stands at £34,049.84 - although it is reviewed every year. The scheme is funded by levies on occupational pension schemes - and dependent on the likelihood of the scheme requiring financial assistance.

The assessment process

Current economic pressures mean insolvency events have become more common in recent years and placed increased pressure on the PPF to deliver compensation. The application process for PPF or FAS compensation reflects this pressure - pensions need to be able to prove the legitimacy of their claim, via a strict assessment period, before access to the funds can be granted. The assessment period for the PPF can last from 6 to 18 months as the assets and liabilities of a pension scheme are established and checked rigorously.

The assessment process for FAS or PPF transfer is demanding - and remains the responsibility of a scheme's trustees. The extra duties PPF transfer brings come in addition to the trustee's standing role - which includes paying pensions and communicating with contributing members. The administrative challenges of PPF transfer are significant - and a burden that can be difficult for lay-trustees without relevant financial experience. With that in mind, many pension schemes seek the services of professional trustees to help expedite the application process: identifying potential problems before assessment begins - or tackling them when they occur. Professional trustees bring independence and years of experience dealing with pension wind-ups - their presence can be beneficial to members who are uncertain or anxious about the status of the PPF transfer - and to lay-trustees without the same level of financial expertise.

Successful application

Once all the requirements of the assessment period have been met, trustees will take the steps necessary to transfer the liabilities and assets of a scheme to the PPF. When PPF transfer is complete, trustees are discharged from their roles and the PPF itself takes complete responsibility for future payments and member communication. The demands of PPF transfer should not be underestimated - the entire process may generate understandable concern amongst members who are worried about their future payments. Ensuring trustees are able to cope with the pressure is crucial to reaching a successful resolution as quickly as possible.

For more information, see Dalriada Trustees’ PPF transfer page. Written by Hal Wightman of Pensions Clarity.