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Compensation CapThe compensation cap is used to determine the level of compensation payable by the Pension Protection Fund to certain individuals. Paragraph 26 of Schedule 7 of the Pensions Act 2004 sets out the circumstances in which the compensation cap applies. Paragraph 27 of Schedule 7 of the Pensions Act 2004 sets out how and when the compensation cap should be increased. The compensation cap is also used in valuation calculations required under Section 179 (risk-based levy calculations) and Section 143 (entry calculation) of the Pensions Act 2004. The application of the compensation cap is described in the two corresponding Valuation Guidance documents prepared by the Pension Protection Fund. The compensation cap varies with the scheme member's age last birthday.We last performed a factor review for this purpose with effect from 11 September 2006. We have now updated the factors to allow for the recent change in the Section 179 and Section 143 assumptions. Therefore, all determinations of PPF compensation, Section 143 and Section 179 valuations with effective dates on or after 1 January 2009 should use the compensation cap factors in this table. Please note that the compensation cap is also subject to an annual review with effect from 1 April to reflect the increase in the general level of earnings in Great Britain since the previous tax year. Factors that were valid for previous periods are available. The compensation cap adjustments are calculated so that, for example, two early retirees in the same scheme who are both subject to the compensation cap would receive the same actuarial value of benefits from the PPF. So although a capped 57 year old would receive a higher PPF pension than a capped 55 year old, the actuarial value of benefits for the two would be the same because the younger member is expected to receive compensation for a longer period of time. Factors to calculate the annualised value of a lump sumThe compensation cap must be compared with an annual value of benefits. The actuarial factors required by paragraph 26 (7) of Schedule 7 of the Pensions Act 2004 for determining the annualised value of a lump sum are set out in this table. This table should be used for all PPF compensation determinations with effective dates on or after 1 January 2009. These factors will be reviewed from time to time. These factors apply to cash lump sum benefits which have accrued alongside pension benefits. These lump sums are sometimes referred to as separate scheme lump sums. The factors for ages under age 50 may be required for the purposes of a Section 179 valuation where cash lump sum benefits have accrued on death before retirement These factors do not apply to lump sums resulting from the commutation of a portion of pension. The treatment of commutation lump sums is set out in paragraph 26 6(b) of Schedule 7 of the Pensions Act 2004, which states that the annual value is "the amount which would have been the protected pension rate had that portion not been commuted." These factors do not apply to the calculation of compensation for non-pensioners from cash-balance schemes. Factors that were valid for previous periods are available |
