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Pension Protection Fund: Everything you need to know

Updated: Aug 27, 2022

The pension protection fund (PPF) was founded in 2005 by the UK government to help protect pension scheme members and trustees of defined benefit pension schemes that are at risk of insolvency.

This includes both public sector and private sector schemes, but it’s particularly relevant to the former given that they’re in greater danger of defaulting on their obligations.

Pension Protection Fund

If you’re invested in or otherwise connected to an affected scheme, it’s important to understand what the PPF does and how it can help you. Let’s take a closer look at everything you need to know about the PPF...

What is the Pension Protection Fund (PPF)?

The Pension Protection Fund (PPF) is a lifeboat for UK pension schemes. It protects the pensions of around five million people in the UK who belong to around 10,000 pension schemes.

If your pension scheme collapses and there isn’t enough money to pay your benefits, the PPF will step in and pay you a safety net level of pension. The PPF is not-for-profit and is funded by a levy on eligible pension schemes. It was set up by the government following the financial crisis in 2008 to protect members of failed pension schemes.

The government can increase or decrease this levy at any time, depending on how much funding they want it to have available.

Every year, the PPF publishes its funding position which tells you how healthy it is at that moment in time. To date it has a reserve pot worth £6 billion - but that's only half of what's needed if all schemes collapsed tomorrow so it needs to be topped up from time to time from public funds if necessary.

What are the risks associated with your scheme?

The Pension Protection Fund (PPF) is a lifeboat for UK pension schemes. It protects members of eligible defined benefit pension schemes if their employer becomes insolvent and the scheme cannot afford to pay them the benefits they are due.

It covers about 1.8 million people in more than 22,000 pension schemes that have not been fully funded on retirement, providing an average payment of £4,800 per person per year (£166 per week).

In total it has paid out over £35 billion in pensions since its inception in 2005 and is expecting to be paying out more than £12 billion each year from 2020 onwards.

Any pension scheme, including your own employer sponsored pension can be at risk of defaulting on its obligations, and end up in the PPF.

Can the PPF save my scheme?

The Pension Protection Fund (PPF) is a lifeboat for defined benefit pension schemes in the UK. It provides compensation to members if their scheme employer becomes insolvent and can't afford to pay their pensions.

The PPF isn't designed to save every scheme, but it does offer a safety net for around 20 million members of around 6,000 schemes. If your scheme is in serious financial difficulty, the PPF could step in and take over, paying compensation to eligible members. But there are strict rules on who qualifies for this protection.

Your fund must be more than 5% underfunded; all its assets must be worth less than its liabilities; there must have been an issue with funding for three years or more; and the trustees or directors of the fund must have failed to make adequate provision in respect of future payments from an employer's pension scheme or schemes.

How much money does my employer need to contribute?

Your employer must contribute a variable PPF levy each year to the PPF for its services. This is a compulsory levy, and is also risk based meaning schemes which are underfunded pay proportionally more fees that those who can meet their liabilities.

Who owns my scheme if it goes into PFF?

The PFF is run by the Pension Regulator, and is funded by a levy on all eligible pension schemes. So, if your scheme goes into the PFF, the fund will become the new owner of your scheme. It's worth noting that once the PFF takes over your scheme, they will be responsible for its future funding.

If your pension pot is small, it may not be worth moving it out of the PFF because this would entail transferring it to another fund - which could cost more than any potential savings you might make from having a lower-cost option.

The risks associated with going into the PFF are relatively low (but not zero). Although some things like high inflation or investment losses are beyond anyone's control, there are some steps you can take to help protect yourself from other risk factors such as company insolvency or political change.

Do I have a say in this process?

The answer is yes! If your employer has become insolvent and there are insufficient funds to pay your pension, the Pension Protection Fund (PPF) will step in.

As a member of a defined benefit scheme, you'll be contacted by the PPF and given the option to transfer your benefits to the PPF.

You'll have 28 days to make a decision, and if you don't respond, your benefits will automatically be transferred.

Pension Protection Fund Conclusion

The Pension Protection Fund is a vital safety net for workers in the UK. It provides protection for workers who have been left without a pension by their employer. The fund is also there to help people who have been mis-sold a pension or have had their pension scheme wind up.

If you're worried about your pension, the Pension Protection Fund can give you peace of mind. You don't have to worry about struggling through retirement with no income because this fund will provide you with enough money every month to live on.

You won't be able to access your original funds from your old company, but if it closes before paying out what it owes then that money will go into the PPF and cover its liabilities.

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