The Pension Protection Fund was set up in 2005 to protect people in defined benefit pension schemes, which are sometimes called final salary pension schemes.
How does the Pension Protection Fund work?
If a company becomes insolvent (i.e. it can no longer pay its debts) and it doesn’t have enough money in its pension scheme to pay what’s been promised to retiring staff or former staff, the Pension Protection Fund (PPF) may step in to help pay pensions, providing certain criteria are met.
If the pension scheme qualifies, the PPF can pay 90% of expected benefits to members below retirement age. Those over retirement age, those receiving ill-health early pensions and those receiving survivors’ pensions normally qualify for 100% compensation. However, there is a cap on how much can be paid out. The cap for most people is currently just over £30,000 but it varies according to age, and is recalculated each year to take inflation into account.
So far, the Pension Protection Fund has dealt with over 800 pension schemes, providing cover for 11 million workers. This has cost £1.8bn, with the PPF raising funds from levies paid by employers with defined benefit pension schemes.
Why does the PPF only protect defined benefit pensions?
Unlike defined contribution pension schemes, which effectively work like tax-efficient savings accounts, a defined benefit pension is basically a promise from your employer to pay you a certain sum on retirement. If your workplace gets into financial difficulty, it may not be able to honour this commitment.
Most modern pension plans (apart from public sector pensions) are defined contribution plans, but in the past many large employers enrolled employees into defined benefit pension plans. If you’re concerned that your pension scheme may be getting into difficulties, take a look at our article on the BHS pension crisis for information about some of the warning signs.
PensionBee puts you in control of your retirement saving by combining your pensions into a new plan that you can manage online. PensionBee pensions are defined contribution pensions, which means your contributions (as well as any contributions from your employer and the government) are invested in a range of assets. Find out more about PensionBee.
Last edited: 30-09-208