In the UK, a company can’t default on its pension obligations unless it goes into liquidation. And the UK Pensions Protection Fund (“PPF”) picks up the bill – within limits — for any UK company being dissolved without having adequate funding for its current and future pensioners. We usually hear the short sound-bite that PPF guarantees 100% of benefits if you’re already retired and 90% if you’re below your scheme’s retirement age.
It’s the “within limits” bit that’s important to understand, and it’s a bit more complicated than it looks.
PPF’s current yearly maximum is limited to a cap of £38,505 at age 65. If you retired at your scheme’s normal retirement and are getting a pension of £38,505 or less, you get 100% of your pension. If you have a pension of £20,000 great, you get £20,000 if it’s £50,000 you’ll lose anything over £38,505.
But note the 100% only applies if you are older that your plan’s usual retirement age when the scheme goes into the PPF. If you took early retirement, and you are older than the plan’s usual age, that’s fine – but if you took early retirement and are still under the plan’s age, your payments are subject to a 90% cap.
Also, if you retired early and are younger than the plan’s usual age the cap itself is reduced. While it’s £38,505 assuming a retirement age of 65, the cap falls to £32,770 if you are 60, and this is subject to the 90%, i.e. £ 29,493.
There’s a bit of the upside. If you have more than 20 years service, the cap increases by 3% for each full year of service beyond 20 years. There’s a downside for long service as well — for the portion of your payment related to pensionable service prior to 1997, there is no increase for inflation. So if you have a number of years service prior to that, that portion of your payment will not increase each year.
PPF may cover less than you’d expect once PPF caps and adjustments are applied. Increases for inflation are in line with PPF rules (like CPI inflation capped at 2.5% max), which may be different from your original scheme.
If you are an active or deferred member pre-retirement age, the amount of the pension you would have been entitled to when your employer went under is determined and gets inflation adjusted during the period until you reach your scheme’s retirement age. At that time, you’d receive 90% of that calculated value (plus inflation) subject to the cap – and this assumes that PPF hasn’t changed the rules or calculations in the meantime.
If you decide to transfer your pension out of your company scheme because you are concerned about its ability to keep on, you do “lose” the benefits of PPF that would protect you and guarantee all or part of your pension income. But it’s important to know the limitations of the PPF as well.
Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC