PPF compensation cap level to be increased

Pension scheme members whose employers go bust before reaching their scheme’s normal pension age will receive some relief after the pensions minister unveiled new rules on compensation paid by the the Pension Protection Fund (PPF).

Steve Webb has announced his intention to increase the compensation cap for longer-serving members by 3% for each year of service over 20 years, but not so as to exceed double the standard cap.

He said the legislation is to be introduced as soon as legislation allows.

The new rules mean that an employee whose employer goes bust before reaching the scheme’s normal pension age will generally see his or her benefits reduced in two main ways:

  • Any PPF compensation will cover 90% of (broadly) the pension the member would otherwise have been entitled to from the scheme.
  • The member’s scheme pension is restricted to a statutory compensation cap, currently set at £34,867.04 for a 65-year-old, even before this 90% adjustment is applied.

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Tim Cox, a pensions partner at Linklaters, said: “The changes that have been announced make the proportionate distribution of the pain a little more equal between members than it has been until now, but the basic anomaly still remains.”

Robert Hawkes, head of PPF services and partner at Barnett Waddingham, added: “Some will question the cut off at 20 years (for example, service needs to be at least 20 years before the cap increases), but there are merits in keeping the approach as simple as possible.”