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FAQs for Scheme MembersThese questions and answers are aimed primarily at members of final salary pension schemes.
My pension scheme began to wind up before 6th April 2005. Will it be eligible for the Pension Protection Fund? The Pension Protection Fund’s purpose is to pay compensation to members of eligible defined benefit occupational pension schemes where there has been a qualifying insolvency event in relation to the sponsoring employer on or after 6th April 2005 and the scheme does not have sufficient assets to meet the level of compensation offered by the Pension Protection Fund. In the case of defined benefit occupational pension schemes which began to wind up before 6th April 2005, compensation may be available for some members from the Financial Assistance Scheme. The Financial Assistance Scheme is not part of the Pension Protection Fund. It will help some people who have lost out on their occupational pension because their scheme was under-funded when it was wound up and the sponsoring employer was unable to make up the deficit. If my pension scheme qualifies for the Pension Protection Fund, what will happen to all the benefits I’ve accrued working for my employer? If the Pension Protection Fund assumes responsibility for your scheme, then compensation will be offered in lieu of your existing scheme benefits at the Pension Protection Fund level of compensation. How can I find out if my scheme is protected by the Pension Protection Fund? Most defined benefit occupational pension schemes and defined benefit elements of hybrid schemes are likely to be covered by the Pension Protection Fund. Defined benefit pension schemes which are not covered will be set out in regulations to be made by the Secretary of State for Work and Pensions in due course. To check that your scheme meets further eligibility criteria, see who is eligible. Under what conditions will the Pension Protection Fund assume responsibility for my pension scheme? Having established that your scheme is eligible for the Pension Protection Fund, your scheme must then satisfy the qualifying conditions. An assessment period will be triggered if there is a qualifying insolvency event in relation to your employer. During this period, the Pension Protection Fund will decide whether it must assume responsibility for the scheme. In particular the Pension Protection Fund will be looking to see if the scheme can be rescued and also whether the scheme has sufficient assets to secure benefits on wind up that are at least equal to the compensation that the Pension Protection Fund would pay if it assumed responsibility for the scheme. The assessment period will take at least one year during which time the scheme will continue to be administered by the trustees subject to various restrictions and controls. The actual timing will be driven by the time taken to determine the eligibility of the pension scheme to be transferred to the Pension Protection Fund. I took early retirement and am in receipt of my pension. I have yet to reach my scheme’s normal pension age. When I retired I chose to commute part of my pension for a lump sum. How will this affect any compensation I might receive from the Pension Protection Fund if it assumes responsibility for my scheme? Where a member has taken early retirement and has not reached normal pension age, the fact that the member has commuted part of his pension for a lump sum will be taken into consideration, for the purposes of applying the compensation cap, when determining the compensation payable to the member from Pension Protection Fund. A member who is in receipt of a pension but has not reached normal retirement age is entitled to compensation at the 90% compensation level, which is subject to the compensation cap. Where a member has commuted part of his pension for a lump sum, in order to check whether the member's benefits are above the compensation cap level the first step is to work out the overall level of the benefit the member has received. If the overall level of benefit the member has received, taking into account the commuted lump sum, is in excess of the compensation cap, the lump sum will be taken into consideration when calculating compensation. Please view the FAQs for industry professionals for an example of how the Pension Protection Fund would calculate the level of compensation. If the member’s benefits, taking into account the commuted lump sum, do not exceed the compensation cap, the lump sum will not be taken into account when calculating the member’s compensation. I am a deferred member of my employer’s pension scheme. I am currently 53 years old. If the Pension Protection Fund became involved with my scheme, would I have to wait until I reach my scheme’s normal pension age to receive my pension? If a member (aged 50 or over) has not retired prior to the scheme entering an assessment period he may apply to the trustees of the scheme for early retirement whilst the scheme is in an assessment period. The trustees should then carry out two calculations. 1.Calculate the member’s pension entitlement under the scheme rules. 2.Calculate what the member would receive under the Pension Protection Fund. (This would include the use of admissible, rather than pension scheme, rules, following Pension Protection Fund rules for revaluation from the assessment date and application of the compensation cap, the 90% rule, and actuarial reduction). The trustees should then bring into payment the lower of the two. Where scheme rules would not permit early retirement, the amount payable under the scheme rules will be £0 so the trustees would bring into payment the lower sum, namely £0. Once in payment, will my compensation from the Pension Protection Fund be increased at all? The part of the compensation that is derived from pensionable service on or after 6 April 1997 will be increased (or ‘indexed’) annually in line with the increase in the Retail Prices Index in the 12 months up to 31st May, capped at 2.5%. The indexation date is 1st January each year, with the first indexation being awarded from 1st January after becoming entitled to compensation, with a proportionate amount payable in the first year of entitlement. Will compensation in respect of pensionable service before April 1997 be increased in payment? In line with the statutory minimum required of pension schemes, no indexation will be paid in respect of pensionable service completed before April 1997. Only compensation derived from pension service on or after 6 April 1997 will be increased in payment. What happens to my life assurance benefits if my scheme enters an Assessment Period? Once an Assessment Period commences, any life assurance cover providing a lump sum under the pension scheme ceases. When a scheme is being assessed or has entered the Pension Protection Fund can a scheme member transfer out? When a scheme is in an assessment period, the trustees may only pay a transfer value where, before the assessment date, the member has requested and accepted the transfer value in writing and has designated a scheme willing to accept that transfer value. Further, the trustees may only pay that transfer value if:
Where the assessment period has come to an end and the Pension Protection Fund has assumed responsibility for a scheme, the member will become entitled to compensation at normal pension age. Once the Pension Protection Fund has assumed responsibility for the scheme, a member would not be entitled to a transfer payment unless pensionable service was ended by the start of the assessment period and at that time the member had less than 3 months’ pensionable service in the scheme. I am 62 years old and 5 months and have retired early, two years ago when I was 60. My normal retirement date is my 65th birthday. If my scheme entered an assessment period now, how would the compensation cap be adjusted to reflect the fact that I am not 65? Would it take into account age in years and months? The compensation cap is adjusted by the compensation cap factors to reflect the member’s age at the time the assessment period starts (or the date your compensation starts if you are not already drawing a pension at that time). These factors are available on the guidance section of the website. The factors use the member’s age at his last birthday, so in this scenario the cap factor that would apply would be for age 62. My current scheme rules say that if I die, my spouse and children would receive a pension. If my scheme were to enter the Pension Protection Fund would this still be the case? Compensation is payable to spouses and unmarried partners under the provisions of the Pensions Act 2004 providing there was provision (including discretionary provision) under the original pension scheme’s admissible rules. Compensation from the Pension Protection Fund is payable in accordance with Pension Protection Fund Rules. In brief, where the admissible scheme rules make provision for a survivor’s pension, spouses and unmarried partners are entitled to periodic compensation of 50% of pension scheme member’s periodic compensation. Evidence must be provided to qualify for compensation. Spouses must provide a marriage certificate and unmarried partners must provide proof that they were both, cohabiting with the pension scheme member at the date of his/her death and that they were financially dependent upon or interdependent with the pension scheme member. In relation to children’s pensions, the amount of compensation payable where compensation is also payable to a surviving spouse or partner is as follows: One child 25% of member’s periodic compensation Two or more children 50% of member’s periodic compensation, divided equally between the children The situation in respect of compensation for surviving dependants is different if the pension scheme’s admissible rules: • provide compensation for surviving spouses or unmarried partners but such a pension is not in payment; or • do not provide compensation for a surviving spouse/partner at all. I am 62 and have taken early retirement under my scheme’s rule which allows members to take early retirement after the age of 50 on a full pension if they are made redundant (there is no reduction for early payment). My normal retirement date under the scheme rules is 65. Have I reached normal pension age? (updated 20/1/06) No. Normal pension age is your normal retirement date under the scheme rules. or such earlier age specified in the scheme rules where the only condition for you to retire without actuarial reduction is the attainment of a particular age or length of service. Where scheme rules permit members to retire before their normal retirement date without actuarial reduction, but any other condition or contingency (for example redundancy) applies, that rule does not operate to reduce the normal pension age of the member. It is possible to have separate tranches of benefits which have different normal pension ages, such as benefits payable for a period of service when that benefit accrued with a different normal pension age. In reaching this conclusion, the Pension Protection Fund has sought the advice of Andrew Simmonds Q.C. Will the compensation cap currently set at £27,770.72 increase each year in the future and if so by what factor? (updated 8/4/08) The compensation cap is subject to review in accordance with paragraph 27 of Schedule 7 of the Act, which provides for the cap to be increased by order of the Secretary of State in line with any increase in the general level of earnings. Any increase will take effect on the 1st April following the end of the tax year to which the review relates. If an individual is a member of two different pension schemes which relate to employment with unconnected employers and the Pension Protection fund (co-incidentally) assumes responsibility for both schemes, does the cap apply to both schemes taken together? If the Pension Protection Fund assumes responsibility for two unconnected schemes of which an individual is a member of both, the cap will apply to each pension and not to the two pensions combined. The fact that an individual has benefits in other schemes will not affect his entitlements in relation to the one scheme in the PPF. This only applies in respect of schemes which are not connected occupational schemes. A scheme is connected with another occupational pension scheme if the same person is or was an employer in relation to both schemes. Do I have to declare the compensation I receive from the Pension Protection Fund to the Department for Work and Pensions? If you are in receipt of certain social security benefits you are required to declare any compensation payment(s) you have received from the Pension Protection Fund to your local Jobcentre, Jobcentre Plus Office, the Pension Service or local authority. Please contact your local Jobcentre, Jobcentre Plus Office, the Pension Service or local authority for further information. |
