15 FAS and the Pension Protection Fund The Financial Assistance Scheme and the Pension Protection Fund This fact sheet accompanies the fifteenth episode of Pensions in 30 Podcasts and provides an overview of the Pension Protection Fund and the Financial Assistance Scheme. This is a series of 30 podcasts covering some of the most important and relevant issues in pensions today. It is brought to you by the Pensions team at Wragge Lawrence Graham & Co. This series has been created to provide an overview of these subjects for anyone who is new to pensions, for those who deal with pensions at work or for people with some experience but who want a high level refresher. We've put together additional resources, including the podcast of this episode, at: To be eligible for help from the Financial Assistance Scheme a fund must have begun winding up between 1 January 1995 and 5 April 2005 and have a scheme employer that is either insolvent or treated as subject to an insolvency event by the PPF. Schemes that began to wind up during the period between 23 December 2008 and 27 March 2014 may also be eligible if they meet certain criteria and are not suitable for admission to the PPF. The scheme has to be underfunded with an employer who cannot meet the shortfall and a member whose benefits were accrued under that employer in the timeframe cited above. www.wragge-law.com/pensionpodcasts. You'll also be able to download all of our other pension podcasts and find links to the team's latest alerts, briefings and webinars. The Financial Assistance Scheme Key points Payments to members are limited to 90% of the pension accrued in the scheme at the start of the wind up and will be made up of remaining scheme funds and an FAS top-up. Members who left before normal retirement age will have their payments revalued and capped, although the FAS does allow for ill-health retirement and spouse/civil partner pensions. The Financial Assistance Scheme is administered by the Pension Protection Fund and was established under the Pensions Act 2004. It provides a top up to defined benefit schemes which are either winding up or already wound up. Main sources Pensions Act 2004
Financial Assistance Scheme Regulations 2005 (SI 2005/1986) (FAS Regulations) the relevant employer ceased to be an employer in relation to the scheme before 10 June 2011. Pensions Act 2007 (Sections 18 and 19) eligibility The Financial Assistance Scheme (Miscellaneous Provisions) Regulations 2008 (SI 2008/1432) What is the Financial Assistance Scheme? The Financial Assistance Scheme or FAS was set up under the Pensions Act 2004. FAS tops up the pension benefits for members of defined benefit pension schemes which are winding up or have wound up (provided certain criteria are met). Assistance can also be paid to the survivor of a pension scheme member (e.g. spouse or certain dependants).the Pension Protection Fund (PPF) administers FAS. Which schemes might be eligible for FAS? For a scheme to be eligible for FAS: it must be a defined benefit scheme (money purchase schemes, public-sector schemes and small self-administered schemes are not eligible); it must have begun winding up between 1 January 1997 and 5 April 2005; and generally either the scheme s employer is insolvent or the PPF has decided to treat an insolvency event as having occurred. The schemes also should have notified FAS of their claims by 28 February 2006 (although in some cases late notification is allowed). A scheme may also be eligible if it began to wind up during the period between 23 December 2008 and 27 March 2014 provided: an insolvency event occurred in relation to the employer before 6 April 2005; there was no qualifying insolvency event for the purposes of PPF entry; and This route was introduced from 24 March 2014 and provides a mechanism for employers who fail to meet the PPF eligibility test as they have never employed active members to obtain FAS help. When might a scheme member be eligible for FAS help? In order to be eligible for FAS help there has to be: an employer participating in the under-funded defined benefit scheme which cannot pay the shortfall in scheme funding (either because it is insolvent or because it is exempt from the obligation to pay its debt to the scheme); and a member of an under-funded defined benefit pension scheme, whose benefits are attributable to employment with that employer, that started to wind-up between 1 January 1997 and 5 April 2005. What does FAS provide? Payments are made to members for life (from normal retirement age as long as that is 60 or over) or from 14 May 2004, whichever is later. The payments are usually a combination of payments from the member s existing scheme and a top up from FAS. Normal retirement age is the age at which a member would normally retire (under the scheme rules). This does not include any rules which allow members to retire early although FAS does allow for ill health early retirements in certain circumstances. Originally there was a minimum payment rule but this was abolished by the Pensions Act 2007. Since 2008, payments have been limited to 90% of the pension accrued in the scheme as at the commencement of winding-up. However, the amount of the payments is subject to a cap, which changes annually. For members who left service before normal retirement age, benefits accrued will be revalued as follows:
from the scheme s wind-up date up to 30 March 2011, in line with the Retail Prices Index (capped at 5%); and Main sources Pensions Act 2004 (Part 2) from 31 March 2011 up to the member s The Pension Protection Fund (Entry Rules) normal retirement age, in line with the 15 Pension Protection Regulations 2005 Fund and FAS Consumer Prices Index (also capped at 5%). In general pensions in payment will be increased but only for accruals from April 1997 onwards and capped at 2.5%. Regulations 2005 The Pension Protection Fund (Compensation) The Pension Protection Fund (Multi-Employer Scheme)(Modification) Regulations 2005 In certain circumstances, members can draw a tax free pension commencement lump sum payment. The Pension Protection Fund (Reviewable Ill Health Pensions) Regulations 2005 Members of more than one FAS scheme will have the FAS cap applied separately for each qualifying The Pension Protection Fund scheme. The PPF is a form of statutory protection for the members of Members can receive a pension from FAS (for DB pension schemes. membership of their own scheme) and payments in respect of a different scheme as a spouse or It was established by the Pensions Act 2004 and came into civil partner of a deceased member. existence on 6 April 2005. The PPF has a formal board made up of a chairman, chief executive and at least 5 other directors. The Pension Protection Fund The PPF can provide compensation to members of DB Key points schemes where the sponsoring employer is insolvent and the scheme has insufficient assets to provide benefits of at least The Pension Protection Fund (PPF) provides equal value to the PPF compensation that would be payable. compensation for members of defined benefit (DB) pension schemes whose sponsoring The Board of the PPF determines which schemes are eligible employers have become insolvent. It was for compensation by applying detailed rules set out in established by the Pensions Act 2004. legislation. To qualify for entry to the PPF a scheme must be an eligible scheme. The Pension Protection Fund (Entry Rules) Regulations 2005 detail schemes that are not eligible. The PPF is funded through levies on eligible DB schemes. If a scheme enters the PPF, the PPF will provide compensation to the scheme's members in place of their accrued pension. This compensation is subject to a cap which (usually) increases slightly each year. Although the PPF provides compensation for all members of eligible schemes, there are limits on the amounts that are paid. The board of the PPF works closely with the Pensions Regulator, as one of the Pensions Regulator s statutory objectives is to limit claims on the PPF. The board of the PPF also has responsibility for the Financial Assistance Scheme.
Entry into the PPF In order to qualify for entry into the PPF, a scheme must be an eligible scheme with a relevant deficit which has undergone a qualifying insolvency event. The occurrence of a qualifying insolvency triggers the start of an assessment period. This is a period during which the scheme s trustees and their advisers work with the PPF to establish whether the scheme is eligible for PPF entry and, if so, the level of benefits which will be used to determine the amount of PPF compensation that is payable to members. Once a scheme has entered a PPF assessment period, there is no guarantee that it will qualify to enter the PPF (for instance if there is possibility of scheme rescue). Where a scheme is sectionalised assets and contributions are allocated to a particular section and cannot be used for the purposes of another section. A scheme s rules may also be drafted so that the scheme is subject to segregation on the insolvency of each employer. When the insolvent employer ceases to participate the assets which relate to the benefits for that employer s members must be segregated from the rest of the scheme s assets. For a sectionalised or segregated scheme each section/segregated part is treated as a separate scheme for the purposes of entry into the PPF. The result is that a scheme could enter the PPF on a piecemeal basis as individual employers become insolvent. For a scheme to be eligible for the PPF: it must be a DB scheme (not a prescribed scheme or a scheme of a prescribed description); it must not have started to wind up before 6 April 2005; it must not be an exempt scheme (e.g. schemes with a Crown guarantee, schemes which are not tax approved (or tax registered from April 2006), schemes with fewer than two members, schemes providing death in service benefits only, schemes with fewer than 12 members where all members are trustees of the scheme, cross-border schemes where the pension scheme in question is not UK registered, a superannuation fund as is mentioned in section 615(6) of the Income and Corporation Taxes Act 1988); and the scheme s trustees must not have entered into an agreement to compromise an employer debt (except in very specific prescribed circumstances). Multi-Employer Schemes and the PPF The treatment of multi-employer schemes depends on the way that the rules are drafted and whether or not they are sectionalised / segregated. If a scheme is not sectionalised / segregated then the whole scheme will be eligible for the PPF only on the insolvency of the last remaining employer (a last man standing scheme). Funding of the PPF The PPF is funded through levies on eligible DB schemes. There are four types of levy: A scheme based levy, calculated using the scheme s liabilities and the number of members; An administration levy, calculated according to the number of scheme members and designed to fund the PPF s administration costs; A Pension Protection Fund Ombudsman levy which has not yet been levied; and A risk based levy. This has created the most concerns for sponsoring employers as the levy is calculated based on a scheme s underfunding risk (the amount by which a scheme s liabilities exceed its assets) and the sponsoring employer s insolvency risk (the likelihood of the sponsoring employer becoming insolvent). It is possible for schemes to take steps to help reduce their riskbased levy.
PPF compensation If a scheme successfully enters the PPF, the PPF guarantees that a certain level of benefits will be met. This is broadly 100% of pensioners benefits, up to a compensation cap of annual pension, and 90% of other members benefits, again up to the same compensation cap. Not all increases to pensions (in deferment and in payment) would be covered (only those applicable to service after 5 April 1997) and dependants benefits may not be paid in full. Section 50 and Schedule 20 of the Pensions Act 2014 increase the compensation cap for individuals who receive PPF compensation and have more than 20 years of service with one employer. The compensation cap will rise by 3% for each year of service above 20 years with a maximum of double the standard cap. These provisions have not yet been brought into force. The compensation cap for 2014/15 is 36,401.19, 90% of which is 32,761.07. Reviewed as up to date to March 2015 More information Find out more about our Pension team at www.wragge-law.com/services/pensions. You can listen to or download the other episodes and get additional material at www.wragge-law.com/pensionpodcasts. You can also stay up to date with the latest pension developments at www.wragge-law.com/insights.