Your final-salary pension scheme is ‘safe’ thanks to the Pension Protection Fund
Really? Is my pension scheme really ‘safe’ thanks to
the Pension Protection Fund?
The Pension Protection Fund (PPF) was set up in 2005 to rescue certain final-salary schemes of crashed companies following a series of insolvencies that left thousands of workers with worthless pension promises.
The PPF offers compensation only to members of eligible defined benefit pension schemes, including final-salary or salary-related schemes, if:
- their employer becomes insolvent on or after 6 April 2005,
- the company pension scheme doesn't have the funds to pay the expected level of benefits, and
- the Pension Protection Fund has become responsible for the scheme.
While most pensions now are ‘money purchase’ schemes, which are ringfenced when a company becomes insolvent, when a final-salary pension scheme collapses, members must seek compensation from the Pension Protection Fund. So, what's the catch?
Despite the safety net offered by the PPF, savers must not assume that their pensions are completely guaranteed.
If your employer goes bust with a final-salary scheme in deficit, the Pension Protection Fund will make payments instead (albeit at a lower level for most people; in some cases even substantially lower levels).
So therefore, you may not receive the type of pension benefits you were expecting, despite the 'guarantee' from the Pension Protection Fund.
What Is The Maximum You Are likely To Get, Currently?
The PPF only partially protects the retirement benefits of staff whose companies collapse. The scheme guarantees workers 90pc of their final-salary pension up to a maximum of £27,000 at age 65.
This compensation falls with age!
If you are 50 when your employer goes under, the most you will get is around £21,000 a year, while if you are 60 you will get £25,000. Are you prepared if your employer goes bust with a final-salary scheme in deficit?
If you are an employee, and a member of a final salary scheme, you may want to take extra precautions so that you are able to withstand any pension setback if your employer goes bust.
Start considering if you should become an early retirement investor in order to Retire Early and Rich.
By the way: how is the Fund actually funded?
The remaining 7,000 or so still solvent final-salary schemes pay an annual levy of £770m to support PPF pension payments and allow the Fund to invest to cover future liabilities.
Pension payments are projected to rocket over the next 20 years as the baby-boomer generation retires. Costs are likely to reach their peak in 2030.
In 2008/09 the Pension Protection Fund paid out just £38 million in compensation payments. By 2012, it predicts it will be paying out in excess of £300 million as a result of the number of scheme members currently queuing up for compensation.
That estimate assumes that no further final-salary schemes fall into the PPF, in reality therefore the actual figure will almost certainly be higher.
If You Ask Me: It's A Ticking Time Bomb!
There are fears that the PPF, which is currently solely funded by the industry levy, and corresponding investment returns thereon, might not be able to pay out if large numbers of companies with final-salary schemes become insolvent in the current economic climate.
Each final-salary scheme that ends up into the Pension Protection Fund is therefore a compound burden. Not only does it mean the PPF has to pay out more, but it also means the PPF has one less paying subscriber to the Fund.
Combined with an increasing number of final-salary schemes winding up, the result will be that the mounting cost of compensation is shared among a decreasing number of final salary schemes. That in itself puts more pressure on the remaining final-salary schemes.
As the number of companies which pay the mandatory levy is shrinking, as more go into administration, this will lead to a greater burden on the smaller, weaker companies that remain.
So where does this leave the PPF?
Well hopefully, with a resurging economy, the scheme will reverse its deficit and continue to make crucial compensation payments to members of failed final-salary schemes.
Nevertheless, by the PPF's own admission, a ‘double dip’ recession would have a serious impact on the deficit. A steep rise in company insolvencies could add to the PPF's future funding deficit.
A sustained Pension Protection Fund deficit could
- mean that the taxpayer is dragged into the equation to fill the breach, or
- it will have to increase the amount of the levy payments, or
- force the Government to reduce the level of protection for pensioners and those approaching retirement. This means: cutting benefits to pensioners.
All of these outcomes are undesirable.
A sustained PPF deficit could Click Here for further information on the Pension Protection Fund , and who is eligible to claim.
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