Looks at the mechanism introduced under the Public Service Pensions Act 2013 to control unexpected changes in the cost of public service pension and how the Government proposes to use it to manage meeting the costs of the McCloud remedy
Documents to download
Pension Protection Fund (990 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 whose sponsoring employer became insolvent after that date.
The PPF provides two levels of compensation: in broad terms -100% to people who have reached their scheme’s normal 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 compensation based on rights accrued from April 1997.
Legal challenges to compensation levels
The European Court of Justice (CJEU) delivered its judgement in the Hampshire case in September 2018. It concluded that Article 8 of the Insolvency Directive 2008/94/EC requires that an individual’s expected old-age pension benefits must be protected to a minimum level of 50% in the event of employer insolvency.
In response to the judgment, the PPF said that there would be a small number of PPF and FAS members affected by the judgement: the vast majority already received more than 50% of the value of their accrued benefits. Pending legislation to implement the ruling, it put in place arrangements that it said would ensure those most affected received an appropriate increase. It has produced FAQs to explain the impact.
In May 2020, the High Court heard a challenge against way the way the PPF was implementing the Hampshire ruling and to the lawfulness of the cap. On 22 June, it ruled in Hughes v PPF that the compensation cap was unlawful on grounds of age discrimination. It said the approach the PPF was taking to implement the Hampshire ruling was permissible, provided that over the course of their lifetime each individual, and separately each survivor, received at least 50% on a cumulative basis of the actual value of the benefits that their scheme would have provided.
On 20 August, the PPF said it had lodged an appeal against the requirement set by this judgement to make sure that members and survivors each received at least 50% on a cumulative basis of the actual value of the benefits their scheme would have provided. It said this would require it to amend its methodology and was different to its view of what the Insolvency Directive required. In addition, DWP is seeking permission to appeal the judgement that the compensation cap is age discriminatory.
Measures in the Pension Schemes Bill 2019/21 (s126) are intended to ensure the PPF can continue to operate as intended, following the decision of the High Court in the Beaton case, which the Government was concerned was being interpreted in ways that had potential for perverse and unintended outcomes (Bill 165-EN, para 665-69).
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; and
- 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 2020 Annual Report, the PPF said the probability of success in relation to this target had fallen from 89% to 83% over the year to March 2020 but that this still indicated “a good level of confidence” that it remained on track to meet it.
Documents to download
Pension Protection Fund (990 KB , PDF)
Looks at the framework within with Local Government Pension Scheme funds in England and Wales make investment decisions, how they can and should take into account environment, social and governance issues, including the risks and opportunities associated with climate change and investment in infrastructure
Looks at the requirements on pension schemes to take account of the risks and opportunities of climate change in their investments and report on how they have done this