Winding Up Pension Schemes & The PPF

It used to be when employers went bust and workers lost their jobs, pension pots, too, likely disappeared into the wide blue yonder, often leaving many with a lifetime of hardship and worry as a consequence. Consequently, institutions such as the Pension Protection Fund were set up to protects the rights of current and former employees.

The Pension Protection Fund, or PPF as it is more commonly known, a public corporation set up by the Pensions Act 2004 and answerable to Parliament, literally protects the pensions of millions of people belonging to defined benefit schemes, such as final salary pension schemes. The PPF also operates a fraud compensation fund, compensating members of all types of pension schemes who have suffered through the dishonesty of employers.

Eligible pension schemes pay levies to the PPF which also generates further income through its investments and by taking over the assets of schemes which transfer to the fund. Some older defined benefit pension schemes fall outside the remit of the PPF. Instead, such pension scheme members are helped through the government-funded Financial Assistance Scheme, or FAS. The PPF also manages FAS on behalf of the government.

The PPF’s website provides a snapshot of the state of the UK economy, listing the latest pensions schemes which have transferred over to the fund. In total, more than 430 schemes have transferred to date with compensation paid out amounting to a staggering £460 million. The average yearly payment paid out per person stands at just over £4,000.

According to figures released for March 2012, pension scheme members seeking compensation included more than 10,000 former Woolworths employees, some 2,200 workers of automotive parts supplier Wagon plc, and 2,064 employees of Salisbury-based Hiflex Fluidtechnik Limited.

All pension schemes go through a rather lengthy and convoluted assessment period prior to entering the PPF, the process being triggered initially by an “insolvency event” – in other words, the company sponsoring the pension scheme has gone into administration. TThe administrators will notify the PPF of the situation by sending them a Section 120 Notice, so they can undergo PPF assessment.

The PPF and the pension scheme’s trustees will now gather the necessary information to determine if the scheme is eligible for PPF protection or not. If it is then the Section 120 will be validated and the assessment period deemed to have begun from the date of the insolvency event.

During this time trustees will need to keep pension scheme members fully informed as to what is going and to keep paying out pensions at PPF levels of compensation throughout the assessment period. A Section 143 valuation by an actuary completes the assessment process confirming whether or not the scheme has sufficient assets and can therefore pay benefits of at least PPF levels into the future. If it can’t then the pension scheme transfers to the PPF.

Members of the pension scheme already in receipt of benefits will likely see very little difference at this stage because they’ll be receiving benefits at PPF levels of compensation. The PPF can also pull out of the process if the employer has been rescued as a going concern, for example, or the business has been sold and some other body takes over responsibility for the pension scheme.