The Pension Protection Fund

These notes are based on the information published by the Pension Protection Fund. They should be sufficient for guidance but should not be considered definitive.

If Halcrow were to become insolvent then the Pension Protection Fund would be notified. Initially, there would be an Assessment Period which may take up to two years. During this period the Trustees also remain responsible for paying pensions at Pension Protection Fund levels of compensation.

The Pension Protection Fund pays two levels of Compensation. The level of Compensation which you qualify for will depend on your status at the start of the Assessment Period for your Former Pension Scheme. Your Compensation will be at 100% level of Compensation as at assessment date, if at the start of the Assessment Period you:

• Had reached the scheme’s Normal Pension Age; or
• Were receiving a survivors’ pension; or
• Were receiving a pension on the grounds of ill-health.

Your Compensation will be at 90% level of Compensation as at assessment date and subject to the Compensation Cap (see the table here for the April 2012 caps, which are age-related and are before the 10% reduction), if at the start of the Assessment Period you:

• were below the scheme’s Normal Pension Age; and
• you were not receiving a survivors’ pension or pension on the grounds of ill-health.

Compensation is calculated based on your pension entitlement earned under your Former Pension Scheme and based on your age and status as at the start of the Assessment Period. The compensation payments appear biased in favour of the existing pensioners, but the formula for the increase in payments is not so generous to them:

• Where any part of your compensation is derived from pensionable service on or after 6 April 1997, that part of your compensation will increase each year in line with inflation, subject to a maximum of 2.5 per cent.
• But, any part of your compensation derived from pension service before 6 April 1997 will not increase.

These rules will, typically, reduce the annual increase in pension of someone who has 3/4 of their pensionable service prior to 6 April 1997 and 1/4 after that date from about 4% per year to about 0.5% per year. Compound that difference over say, 10 years, and the pension increase shrinks from a generous 50% to a miserly 5%. In real terms the pension will be shrinking in value.

The final stage of the Assessment period is the production of a section 143 valuation by an actuary (note that the July 2012 changes to the PPF regulations provide for an alternative, faster, process in some circumstances). This is a confirmation of whether the scheme can pay member benefits at or above PPF levels. If not, the scheme will transfer to the PPF.

So what happens if the scheme is considered adequately funded to avoid transfer to the PPF? A scheme will not transfer to the PPF if:

• the scheme is rescued, ie a new employer takes on responsibility for the scheme, or
• the scheme has enough assets or money to buy benefits with an insurance company which are at PPF levels of compensation or above.