Commentary on Sections Summary Compensation cap
594.Paragraph 26 makes provision for the compensation cap. This is the amount which will be specified by the Secretary of State by order. The compensation cap is expected to be £27,777 in the first year for persons who are aged 65. Paragraph 27 requires him to increase the amount specified where a review under section 148(2) of the Social Security Administration Act 1992 concludes that there has been an increase in the general level of earnings.
595.The compensation cap will apply to persons in receipt of a pension from a scheme before the assessment date who were under normal pension age when the pension commenced and were not eligible for the pension on the grounds of ill health (paragraph 3). It will also apply when active members and deferred members under normal pension age become entitled to pension compensation and/or lump sum compensation (paragraphs 11, 14, 15 and 19). The compensation cap will apply at the date when a person became entitled to pension compensation. It may be actuarially adjusted if the person had not attained 65 or was 66 or over at the date when he first became entitled.
596.Where the member was entitled to a pension or other benefit under the scheme rules and this exceeds the compensation cap, he cannot receive more than 90% of the cap. If the total were less than the cap then he will receive 90% of that amount. Where a pension was already in payment (where under normal pension age) and part of it had been commuted, the amount used for the purpose of calculating pension compensation will be the full amount of the pension before commutation and this total will be reduced to the level of the compensation cap, if it exceeded it. If a lump sum had already been paid then it will be added to any pension in payment for the purpose of calculating pension compensation. If this total exceeds the cap then no more than 90% of the cap can be paid as pension compensation.
597.When calculating the total benefits to which there is entitlement under the scheme, account will also be taken of benefits received from connected occupational pension schemes. Regulations will also provide that paragraph 26 will apply with modifications where a person becomes entitled to pension compensation and had previously been entitled to compensation in respect of benefits under the scheme or a connected scheme or became entitled to one or more lump sums under the scheme or a connected scheme. A scheme is a connected scheme if it has the same employer.
598.Regulations may also prescribe sums to be disregarded for the purpose of paragraph 26.