The Pension Protection Fund (PPF) protects people with a defined benefit pension when an employer becomes insolvent. If the employer doesn’t have enough funds to pay you the pension they promised, the PPF will provide compensation instead.
What happens if your scheme’s employer becomes insolvent?
Defined benefit schemes are also known as final salary and career average pensions.
When an employer with a defined benefit pension scheme becomes insolvent, the PPF steps in.
The PPF was set up by the government in April 2005 and protects millions of people throughout the UK.
The PPF will assess the scheme to see if members qualify for compensation. This is known as the ‘assessment period’.
The PPF aim to complete assessment for most schemes within two years. During the assessment period, the PPF will decide whether it can accept the scheme or not.
If the scheme and its members qualify, it will enter PPF assessment.
During that time, the PPF will assess the level of assets within the pension scheme. They’ll see if they are enough to enable an insurance company to buy out, and then pay, the pension benefits at the same amounts as the PPF compensation.
During the assessment period:
- no further contributions can be paid and no new members admitted, so no further benefits can be built up
- no transfer of benefits out of the scheme would be allowed unless an application was made before the assessment period and the trustees agree to the transfer.
If there are enough assets in the scheme to secure an insurance buyout, the pension scheme would leave the PFF assessment period.
If there are not enough assets in the scheme to secure an insurance buyout, the scheme would be admitted into the PPF. The PPF would continue to pay the pension incomes to members at the relevant compensation levels.
Find out more about defined benefit pensions in our guide Defined benefit (or final salary) pensions schemes explained
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How much does the Pension Protection Fund cover?
If your pension scheme qualifies, the amount of compensation you get depends on whether you had passed your pension scheme's normal pension age when your employer became insolvent.
Anyone receiving survivor’s pensions, such as a widows, widowers, children’s, civil partner’s pensions will also normally qualify for 100% of the pension income.
If you were over your pension scheme's normal pension age or started drawing your pension early to due to ill-health, you’re entitled to receive a full pension from the PPF.
If you were under your normal pension age, you’re entitled to receive a pension of 90% the amount you’ve built up when your employer became insolvent. Since July 2021 there has been no upper cap on this amount.
Any compensation paid will be increased in line with legislation and not with the former scheme rules.
Increases in PPF compensation will be limited to benefits built up from 6 April 1997 only. Increases in payment are in line with inflation, capped at a maximum of 2.5%.
The PPF doesn’t apply to defined contribution workplace pension scheme benefits (money purchase benefits).
The Financial Assistance Scheme (FAS)
The FAS is run by the PPF and was set up to protect members who had defined benefits where:
- the pension scheme came to an end between 1 January 1997 and 5 April 2005 and
- the pension scheme couldn’t afford to pay those benefits promised to members.
FAS benefits are regarded as compensation and are paid in the form of a top-up. This aims to provide members with 90% of the defined benefit pension that they would have received at their normal pension age. This is up to a cap of £41,888 a year in the 2023/24 tax year.
If you’re unable to work because of ill health, the FAS can make payments before your normal retirement age, but there might be some restrictions. The FAS can only provide compensation for defined benefit schemes.
