What is the Pension Protection Fund?
The Pension Protection Fund (PPF) has increasingly been in the news recently as it comes under pressure from the collapse of private pension schemes, one of the most recent being Sir Philip Greens Arcadia Group pension scheme.
So, what is the PPF and what protection does it offer?
Set up in 2005, the PPF is there to offer protection to individuals where their employers go bust and there was a final salary pension scheme run by the employer. Final salary pensions are guaranteed by and operated by employers, unlike other more common personal pension schemes where pension contributions are paid to a third-party scheme administrator to hold and invest on their behalf. When an employer goes bust the pension scheme goes into what is called an assessment period. In the assessment period the pension scheme and fund are examined, and a decision is taken as to whether it can continue to operate or has enough money to be able to be taken over and run by an insurance company or even another employer. If that is not possible then the scheme will enter the PPF.
The PPF steps in to administer individual pensions and crucially guarantees that scheme members will receive at least 90% of their pension entitlement. That is why the scheme is such an important lifeboat for final salary pension members.
Some members will still receive 100% of their retirement income, especially those who retire on ill health grounds or spouses of scheme members who have died. There are rules within the PPF to calculate what level of benefits you would receive but it will be between 90% and 100%.
It is probably a good idea to talk to a Pension Adviser if your employers scheme has entered the PPF and your employer will probably recommend that you seek independent financial advice and get a Pension Review.
The scheme is funded by the assets of all the schemes that have previously entered the scheme and by a levy paid by other pension scheme operators. Currently there are over 5,000 employer schemes being administered by the PPF, however the scheme is currently running a deficit of £65 billion (January 2021). That might sound like a lot, but it means that scheme is actually 95% funded.
This is in stark contrast to the public sector pension scheme run by the Government to finance public sector pensions. This is an unfunded scheme. The Government pays for public sector pensions out of tax on an ongoing basis. You might be surprised to know that the public sector pension liabilities currently stand at £1.2 trillion (£1,200,000,000,000) that is a staggering 55% of current GDP. More than half of the UK’s national economic output would be required to finance the Governments pension bill to its public sector workers. That does not include the state pension liabilities. Those currently stand at an enormous £6.4 trillion.
To find out more about the PPF visit their website here.
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