This Commons Library Briefing Paper discusses the new public sector exit payment cap that comes into force in November 2020. In particular, it considers how the cap could impact lower-income workers and the circumstances in which the cap can be relaxed.
Documents to download
Pension Protection Fund (964 KB, PDF)
The Pension Protection Fund (PPF) was one of the measures set up by the Pensions Act 2004 in response to a series of high-profile cases in which pension schemes had wound up with insufficient assets to meet their pension commitments. It was established to pay compensation to members of defined benefit and hybrid occupational pension schemes where an employer has become insolvent, and where there are insufficient assets in the pension scheme to cover PPF levels of compensation. It commenced operations on 6 April 2005 and applies to schemes that started winding up after that date.
The PPF provides two levels of compensation: in broad terms -100% to people who have reached pension age or are in receipt of an ill-health or survivors’ pension at the time the scheme enters the PPF assessment period and, in other cases, 90% subject to a cap. There are other ways in which PPF compensation does not necessarily match what would have been provided by the pension scheme had not wound up. For example, indexation is only provided on rights accrued from April 1997.
Pension protection compensation rules have been subject to legal challenges:
- In the Beaton case, the High Court decided that when applying the compensation cap, benefits derived from a transfer-in from another scheme could not be said to be attributable to ‘pensionable service’ and therefore could not be aggregated for the purpose of the compensation cap. The Government was concerned that it had resulted in the legislation being interpreted in ways that had potential for perverse and unintended outcomes. It introduced regulations (SI 2018/988) to ensure that a “relevant fixed pension that was derived from service in another scheme is treated as attributable pensionable service for the purpose of calculating PPF compensation (except for the purposes of applying a single compensation cap).” This was to ensure that the PPF had the legal basis to pay survivor benefits and to index and revalue payments. Clause 125 of the Pension Schemes Bill [HL] 2019/21 published on 7 January 2020 would make this retrospective.
- The judgment of the European Court of Justice (CJEU) in the case of Grenville Hampshire provided that individuals are entitled to receive compensation to at least 50% of the value of their accrued pension entitlement from the PPF. In response, the PPF says that the vast majority of PPF and FAS members already receive compensation in excess of this. It is implementing a plan to identify those affected and pay appropriate increases.
- The European Court of Justice delivered its judgement in the German case, PSV v Bauer on 19 December 2019. The PPF said the judgment restated the determination in Hampshire that “as a minimum, every individual must receive at least 50% of their accrued benefits.” While there were other details of the judgment that it would need to work through with DWP, it would “continue to make payments in line with the existing levels, and to assess and increase payment to those members affected by the Hampshire ruling.”
- On 22 June 2020, the High Court ruled that the compensation cap was unlawful on the grounds of age discrimination. It held that the PPF’s approach of making a one off-calculation (in response to the Hampshire judgment) was permissible, provided it made sure that each individual, and separately each survivor, over the course of their lifetime received at least 50% on a cumulative basis of the actual value of the benefits that their scheme would have provided.
Funding the PPF
The PPF is funded by a combination of:
- The assets transferred from schemes for which it has assumed responsibility
- Recoveries of money, and other assets, from those schemes’ insolvent employers
- An annual levy raised from eligible pension schemes
- Investment returns on assets held by the PPF
The pension protection levy is comprised of a risk-based levy (required by law to be at least 80 per cent of the total) and a scheme-based levy, making up the remainder.
The Secretary of State is required to set a levy ceiling each year, at a level “sufficient to allow the Board of the PPF to raise a levy that ensures the safe funding of the compensation it provides, whilst providing reassurance to business that the levy will not be above a certain amount in any one year.” The ceiling is increased each year in line with earnings and can be increased by more if the Board makes a recommendation to that effect and the Treasury approves. Once the PPF has set its estimate, it uses a “scaling factor” to distribute the levy proportionately among eligible schemes. The PPF aims to keep the levy stable for three years. On 16 December 2019, it confirmed that its levy rules for 2020/21 would remain “stable and broadly unchanged from previous levy year.” Its levy estimate for 2020/21 was £620 million (PPF confirms levy rules for 2020/21).
The PPF has a target of becoming self-sufficient by 2030. This is because it expects there to be fewer claims from schemes on the PPF in future and that the “the levy we need to collect will be small in comparison to our own assets and liabilities.” At this point, it will need to have confidence that it is holding enough money to pay compensation to members and protect them adequately from the risk of adverse conditions thereafter. (PPF Strategic Plan 2019/22). Its 2019 Annual Report said the PPF was 118.6% funded at end March 2019 – which it described as a high level of confidence that it remained on track to meet its self-sufficiency target by 2030.
Documents to download
Pension Protection Fund (964 KB, PDF)
Briefing on the Social Security (Uprating of Benefits) Bill 2019-21, which would enable uprating of the State Pension and the Pension Credit Guarantee in the event of earnings falling year-on-year in the three months to July 2020
Looks at the Pension Schemes Bill 2019-21 which covers Collective Money Purchase Schemes, Pensions Dashboards and stronger powers for the Pensions Regulator