On 4 December 2012 the Pensions Minister, Steve Webb, announced a review of the Pension Protection Fund (PPF) compensation cap. This speedbrief considers this announcement and its implications.
PPF compensation: a quick reminder
The PPF exists to provide a safety net for members of underfunded pension schemes following the insolvency of the sponsoring employer. The PPF does not provide transferred members with exactly the same benefits as they would have received from their schemes. Instead, the PPF provides the following as compensation:
- 100% of pension for members who have already reached normal pension age (NPA). Whilst there is no cap on the amount payable, only post-1997 benefits are subject to indexation (CPI limited to 2.5%).
- 90% of pension for members who have not reached NPA subject to a cap. Currently the cap is around £34,000 at age 65 which means that the maximum compensation is around £30,000 after the cap and the 90% have been applied. The cap becomes progressively less for members at younger ages.
Effect of the PPF compensation cap
Figures produced by the PPF in March 2011 make it clear that there are individuals who are affected by the PPF compensation cap as follows:
- 530 receive 90-100% of the pension they would have got,
- 665 receive 80%-90% of the pension they would have got,
- 30 receive 70%-80% of the pension they would have got,
- 15 receive 60%-70% of the pension they would have got, and
- Less than 10 receive less than 60% of the pension they would have got.
It is not just high earners who may be affected by the compensation cap. Members with very long service in a scheme may also be affected.
The Minister announced a review of the PPF compensation cap in a House of Commons debate on 4 December 2012. He commented,
"Over the 2 and half years I have had this role I have become increasingly concerned that the cap for those who have not reached scheme pension age is acting in a penal way, not on the people that it was intended to effect, which is the fat cats who might have had a moral hazard issue, but simply on long serving workers".
There are currently no details available relating to the timetable for this review.
This announcement will be welcomed by many. The PPF cap has, as the Minister acknowledges, proved unfair to many. The NPA operates as a cliff edge. One member can receive unlimited compensation. Another member who is a few days younger can see his pension massively cut back, potentially to less than 50%. The European Court in Robins v Secretary of State for Work and Pensions has said this would be inadequate.
The Minister's proposal for a more proportional cap, linked to length of service, seems eminently sensible. If he is concerned as to the cost burden on the PPF, he could alleviate this by applying a more realistic cap to members over NPA. Few people would consider it necessary for high earners with pensions massively in excess of £100,000 to receive 100% protection, funded by other PPF levy payers. A rebalancing of the protection towards the long serving workers penalised by the current cap would be much fairer, though may make for greater complexity.