Coronavirus, a second lockdown, more furlough and seemingly a bleak outlook for winter pushed us to revisit the Pension Protection Fund this week. This is a compensation scheme for company pension schemes where employers become insolvent.
There are basically two types of pension in the UK that you employer may offer.
- Company/Occupational Pensions – governed by HMRC company scheme rules on benefits, revaluation, funding levels etc and protected, in the event of employer collapse by the Pension Protection Fund (PPF).
- Grouped Personal Pension, Group Stakeholder Pension and Workplace Pensions are usually private, personal pension schemes in your name (not the employer) and are protected by the Financial Services Compensation Scheme (FSCS) in the event of the pension company (not the employer) going into liquidation. If the employer closed, the pension is in your name already.
If you are a member of an occupational pension scheme and the sponsoring employer goes into liquidation thus dragging the pension scheme with it, the PPF scheme will usually take over.
- If you are already at or over the normal retirement age of the scheme, 100% of your pension will be protected up to a cap (£41,161pa as at 2020/21).
- If you are below normal retirement age, 90% of the pension benefits you have accrued will be protected up to a cap (£37,315 pa as at 2020/21).
In addition, depending upon when your pension benefits were built up, pensions in payment increases are:
- Service before April 1997, there will be no increases in your pension under the PPF even if your original scheme offered more generous increases (there was no legal requirement to revalue pension payments before April 1997).
- Service after April 1997 (post 97 service) then any indexing of benefits will be protected in line with Limited Price Indexation (LPI) i.e. the lower of 5%pa increases or Consumer Prices Index (CPI) – this is the law for all company pensions and will be used even if your old scheme used the more generous Retail Prices Index (RPI).
- Service after April 2005, the law changed and LPI was reduced to the lower of 2.5%pa increases or CPI. Even if your scheme had kept the higher 5%/LPI after 2005, in the PPF you will only receive the statutory minimum increases of LPI 2.5%pa/CPI.
Private Pensions Compensation
For private, personal pension type schemes, this would come into force if the pension company went into liquidation (not the employer) as the pension fund is in your sole name. The Financial Services Compensation Scheme woul then take over subject to similar 100% and 90% protection as above although there is no indexation as your pension fund is an investment and used to rise or fall in value with markets.