The PPF: no pain, no gain?

Helen Powell

The festive season is behind us, spring is on the way, and here we are in the gap between the two: it must be Pension Protection Fund levy season.  This is the time of year when sponsors of defined benefit schemes are busy thinking about their upcoming levy bills, and what they can do to keep them as low as possible. 

For larger, stronger schemes, there’s a perception of unfairness in the way the levy gets tilted more and more heavily towards schemes that can pay.  Of course, the PPF argues that all should bear the pain, since all gain the same protection – a place in the lifeboat should they need it (try not to think about the Titanic at this point).  But the statistics in the latest Purple Book (the joint publication from the Pensions Regulator and the PPF which contains data on the risk profile of the DB pensions universe) would suggest that not everyone benefits equally.

As at 31 March 2009, 100 schemes had entered the PPF.  30,732 pensioners and deferred pensioners were receiving or expecting to receive PPF compensation following the collapse of their employer.  What’s startling is that over 75% of that compensation was attributable to employment in collapsed manufacturing firms, and that those firms are very largely concentrated in the West Midlands: a rather sad reflection (speaking as a Wolverhampton girl) on the decline of traditional Black Country industry.  Ironically, manufacturing also saw the largest monetary increase in levy payments for the 2007/8 levy year, up 47.5% from £181.6 million to £267.8 million.  The whole thing begins to seem a bit circular at this point: no wonder more and more schemes are doing all they can to limit their levy.  

But even in the lifeboat, are you safe?  At the lower end of the compensation scale, maybe so – and numerically speaking, the lower end is substantial.  40 to 45% of those covered by the PPF receive, or can expect, less than £2,000 compensation a year.  Only 29 of the 12,723 PPF pensioner members have so far been affected by the compensation limit, which caps benefits at just under £28,750 for those who turned 65 in 2009/10. 

For the individuals involved that’s clearly a personal disaster, making the PPF look like a threat rather than a lifeboat.  There are specific danger areas – using AVCs to buy extra scheme pension, for example, and the existence of a final salary underpin attached to money purchase benefits (however small the underpin may be in relation to the overall benefit).  There’s potential for some surprising winners and losers, depending whether the scheme enters the PPF or winds up outside it; and for high earners, it’s crucial to make sure the right arrangements are in place before the ship starts to go down.

Helen Powell is a senior professional support lawyer at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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