Commentary on Sections Part 6 – Private Pensions Section 50: Pension Protection Fund: increased compensation cap for long serviceSchedule 20: Pension Protection Fund: increased compensation cap for long service
202.The Pension Protection Fund (PPF) pays compensation to members of eligible, occupational pension schemes where the employer becomes insolvent, leaving the scheme under funded. Anyone under the scheme’s normal pensionable age when the employer becomes insolvent is paid compensation based on 90 per cent of their expected scheme pension subject to a maximum cap - ‘the compensation cap’.
203.Section 50 and Schedule 20 provide for a revised compensation cap dependent on a person’s age and length of pensionable service when the person first becomes entitled to compensation.
204.Paragraphs 1 to 3 of Schedule 20 amend Schedule 7 to the PA 2004 to insert new paragraph 26A which gives the meaning of the revised compensation cap. The standard amount, calculated in the same way as the current compensation cap amount, will apply for anyone with pensionable service of less than 21 years. For anyone with 21 years or more pensionable service, the cap will be increased by 3 per cent of the standard amount for each full year over 20 years, to a maximum of double the standard amount.
205.Paragraphs 4 to 6 and 13 make consequential amendments to the PA 2004.
206.Paragraphs 8 to 12 of Schedule 20 make transitional provision for members who are entitled to PPF compensation when the long service compensation cap is introduced. Under paragraph 8(2) the PPF will be required to recalculate the ‘protected pension rate’ as if the long service compensation cap had been in force when the member first became entitled to compensation. The ‘protected pension rate’ is the protected pension rate or protected notional pension on which the amount of compensation payable depends and the PPF must, therefore, redetermine the compensation and change the payment. This applies to both members of the original scheme and any of their survivors and dependants who are in receipt of compensation when the long service cap legislation comes into force.
207.Any indexation that had been awarded before the legislation comes into force will be maintained by adding the amount of that indexation on to the revised compensation amount (paragraph 8(5) of the Schedule).
208.All other elements used in calculating the compensation payable will be unaffected by this change:
209.With one exception, there will be no backdating. Any increase will be effective only from the date the legislation is commenced. Members who are continuing to postpone payment of their compensation at that time will have the increase applied when they take their postponed compensation.
210.Paragraph 12 deals with those who received a terminal illness lump sum in the year prior to the long service compensation cap legislation being commenced and makes an exception in backdating any increase due to the revised compensation cap. Where the recipient is still alive when the legislation is commenced, the lump sum will be re-calculated as if the long service cap legislation had been in force at the date of entitlement and arrears paid.
211.Paragraphs 14 to 17 make transitional provision for schemes undergoing assessment for entry to the PPF or winding up on the date the long service compensation cap comes into force.
212.An eligible pension scheme with an insolvent employer enters an “assessment period” during which the PPF determines whether the scheme will enter the PPF. Part of the assessment process involves the scheme assets being compared against the scheme’s ‘protected liabilities’ - the cost of providing annuities to cover the compensation that the PPF would pay if the scheme did enter the PPF. Paragraph 14(2) provides that, for schemes in the assessment period when the long service compensation cap legislation comes into force, the valuation of its protected liabilities should be completed on the basis that the long service cap has not been introduced.
213.A scheme can apply for the decision on whether or not they enter the PPF to be reconsidered. Where a scheme enters the assessment period before the long service compensation cap legislation is commenced and subsequently asks for such a reconsideration, paragraph 14(2) provides that this consideration should be done on the basis that the long service compensation cap has not been introduced.
214.During an assessment period the scheme trustees continue to pay scheme pensions as they fall due, but the payments must be reduced as necessary so as not to exceed the level of compensation the PPF would pay should the scheme enter the PPF. Paragraph 14(3) requires scheme trustees to increase pension payments during the assessment period to reflect the introduction of the long service compensation cap, where appropriate.
215.Paragraph 15 provides for how the long service compensation cap applies where a scheme began wind up, or is treated as having begun wind up, before the long service compensation cap legislation comes into force. This could be where a scheme begins to wind up without having been through a PPF assessment period, or where a scheme has been in the assessment period and left it without transferring to the PPF. Schemes winding up are required to allocate assets in accordance with the statutory priority order in Section 73 of the PA 1995. They are also required under section 73A of that Act to restrict payments of pension to the amounts which the scheme will be able to satisfy on wind up.
216.In general the priority order requires the asset allocation to begin with covering the compensation that would have been paid had the scheme entered the PPF. Paragraph 15(2) provides that where a scheme began wind up before the long service compensation cap is introduced it should continue to allocate assets and restrict pension payments on the basis the long service compensation cap had not been introduced. Paragraph 15(4) clarifies that if a scheme is winding up and also in a PPF assessment period, pension payments should be increased to reflect the introduction of the long service compensation cap.
217.Paragraphs 18 and 19 deal with the definition of terms used in the schedule.
218.Paragraphs 20 to 22 clarify that transitional provision can be made under section 56(8) of the Act, particularly in relation to pension compensation sharing and cases where a member has multiple benefits.