Pension Compensation: Protection Fund Commencement

The Pension Protection Fund (PPF) has been launched by the Government to act as a ‘safety net’ for members of pension schemes where there is a ‘qualifying insolvency event’ after 6 April 2005. A qualifying insolvency event is an insolvency relating to an employer where there are insufficient assets in the employee pension scheme to cover pension liabilities under final salary schemes. When there is such a shortfall, compensation will be payable by the PPF.

It is compulsory for all final salary pension schemes to be members of the PPF, which will be funded by a levy on the pension funds. The intention is that members of working age should receive 90 per cent of the pension they were due on retirement and retired members 100 per cent.

The new provisions will come as a relief to members of such schemes, of which more than 125 were wound up in 2003/4. However, in practice, the new rules are likely to hasten the flight of employers away from final salary schemes.

The Government has also contributed £300m to the Financial Assistance Scheme, which has been set up to compensate employees whose pensions schemes collapsed between 1 January 1997 and 5 April 2005. Whilst this may look like a generous sum, the recent collapse of engineering firm Turner and Newall’s pension fund alone left a funding gap of nearly £1bn.