Increase to PPF compensation cap for long service

Written on 26 Sep 2016

The DWP has recently published long-awaited confirmation that the long service element of the Pension Protection Fund (PPF) compensation cap will come into force on 6 April 2017. The proposed extension to the cap was first announced by the DWP in a written ministerial statement from the (then) Pensions Minister Steve Webb on 25 June 2013. However, despite being included in the Pensions Act 2014, it was not brought into force.

The PPF currently provides compensation based on 90% of an individual’s accrued pension if they are below the scheme’s normal pension age when the employer enters insolvency. This compensation is subject to a cap, with the current maximum compensation set at £33,678.38 per annum, at age 65. The DWP’s intention was that the compensation cap should reflect the fact that people who have worked for a long time for one employer should receive higher compensation because the lost scheme pension is likely to have represented a larger proportion of their retirement savings.

The changes were included in the Pensions Act 2014, and were intended to amend the pension compensation provisions in Schedule 7 to the Pensions Act 2004. Until the recent DWP announcement, there had been no indication of when (or whether) the changes would be brought into force.  However, from 6 April 2017, it is now planned that the ‘long service’ compensation cap will apply as follows:

  • The cap will be increased by 3% for every full year of service above 20 years (i.e. 21 years or more), with a maximum of double the standard cap.
  • Service transferred from a previous scheme will count towards the qualifying periods.
  • Increased entitlement will not be backdated. The increase will begin from the date the legislation is brought into force, which is planned for 6 April 2017.
  • The cap will affect any scheme if it begins to wind up or enters the PPF assessment period after the revised cap is introduced.
  • Those already in the PPF will be moved onto this method of calculating the compensation cap.
  • The revised cap will also apply to members of schemes winding up outside the PPF with sufficient assets to meet their protected liabilities.  However, where a scheme is winding up outside of the PPF, and has a winding up date prior to the long service cap coming into force, the DWP state that it should follow the statutory priority order and allocate assets as if the long service cap did not exist.
  • A member who received a lump sum, instead of an income, due to terminal illness, will have this amount recalculated where this payment occurred within a year of the long service cap legislation coming into force.

Osborne Clarke is a member of the PPF’s Assessment Period Legal Panel.