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.