Better Benefits for Long-Term Workers in the PPF, But Who’s Paying?

(June 25, 2013) — Long-serving workers of insolvent company pension schemes will receive improved pay-outs from the UK’s pensions lifeboat, under plans unveiled by the minister for pensions on Tuesday.

Under existing arrangements, all beneficiaries of the Pension Protection Fund (PPF) are entitled to a maximum annual pay-out of £31,380.

This, pensions minister Steve Webb said, unfairly hits those who have a history of long service, and therefore have saved more into their pension pot.

Webb proposed that the government should increase the maximum level for those receiving capped compensation by 3% for every year of service over 20 years, up to a maximum of double the standard pay-out rate.

This means someone who has contributed to a pension scheme for 40 years and accrued a pension of £50,000, only for the scheme to wind up and have insufficient funds to pay out, would receive £45,000 – rather than the current capped amount of £31,380.

Webb said in a statement: “It cannot be right that someone who has been with a company for much of their working life–and relies heavily on that for their pension income–gets the same in compensation as someone with far shorter service and who could also have other pension income to fall back on.

“I want to ensure that those who are or could be affected will in future have their long service recognised in the form of higher compensation.”

Those who stand to gain extra compensation will either already be in receipt of capped compensation or would have their pension capped when they come to pensionable age.

They will also need to have been a member of a scheme for 21 years or more when the scheme transferred to the PPF.

And the revised compensation cap will not be backdated: anyone covered by this change who is already in receipt of capped compensation will get the increase from the date the relevant legislation is in place.

While this is positive news for long-serving pensioners-to-be, so far nobody’s explained how the Department for Work and Pensions (DWP) plans to pay for this.

The obvious suggestion is for the PPF’s levy, applied to all eligible defined benefit schemes in the UK, will face an increase.

The levy is already facing a 10% hike, driven by a fall in gilt yields and the discovery that some contingent assets being used by companies to lessen their levy levels were not as strong as advisors had made them out to be.

When asked whether today’s announcement would result in a further increase, a PPF spokesperson said: “We will be looking at the implications for PPF members and levy payers of the applying the new compensation cap. We note the DWP figures on likely costs. We will be considering them once Parliament agrees the final form of any changes to the compensation cap and what the implications for the levy might therefore be.”