Pension Security
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Pension Security
Pension Security
Pension Protection Fund (PPF)
The Pension Protection Fund (PPF) was set up in April 2005 to protect you if your employer goes bust and its pension scheme can no longer afford to pay you your promised pension. This only applies to defined benefit pension schemes and not to money purchase schemes.
If you are a member of an eligible scheme, and you have reached the scheme's normal pension age, the PPF will generally pay you 100 per cent compensation for what you should have received at the time your employer went bust. They will also generally pay 100 per cent compensation to those who have retired on legitimate ill-health grounds, regardless of age, and to those receiving a pension in relation to someone who has died.
If you have retired but have not yet reached the normal pension age of your scheme, the PPF will pay you up to 90 per cent compensation. The same applies if you are yet to start receiving pension payments. This level of compensation is subject to an overall cap which is recalculated each year. Between April 2009 and March 2010, the cap at the age of 65 equates to £28,742.68 (once account is taken of the 90 per cent level of compensation).
In all cases, increases in future payments won't be as much as expected.
Financial Services Compensation Scheme (FSCS)
The Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This will generally be because it has stopped trading and has insufficient assets to meet claims, or is in insolvency.
FSCS covers business conducted by firms authorised by the Financial Services Authority (FSA), the independent watchdog set up by government to regulate financial services in the UK and protect the rights of consumers. European firms (authorised by their home state regulator) that operate in the UK may also be covered. FSCS protects:
- deposits;
- insurance policies;
- insurance broking (for business on or after 14 January 2005);
- investment business; and
- mortgage advice and arranging (for business on or after 31 October 2004).
The FSCS operates different levels of compensation according to the type of investment involved.
Deposits
- £50,000 per person (for claims against firms declared in default from 7 October 2008).
- 100% of the first £50,000.
Investments
- £48,000 per person.
- 100% of the first £30,000 and 90% of the next £20,000.
Mortgage advice and arranging
- £48,000 per person (for business conducted on or after 31 October 2004).
- 100% of the first £30,000 and 90% of the next £20,000.
Long-term insurance (e.g. pensions and life assurance)
- Unlimited.
- 100% of the first £2,000 plus 90% of the remainder of the claim.
General insurance
- Unlimited.
- Compulsory insurance (e.g. third party motor): 100% of the claim. Non-compulsory insurance (e.g. home and general): 100% of the first £2,000 plus 90% of the remainder of the claim.
General insurance advice and arranging
- Unlimited (for business conducted on or after 14 January 2005).
- 100% of the first £2,000 plus 90% of the remainder of the claim. Compulsory insurance is protected in full.
The best way to see what compensation basis applies is to examine the different types of investment in different types of pension arrangement.
Personal Pension Plans (PPPs)
Personal Pension Plans include Stakeholder Schemes and Self Invested Personal Pensions (SIPPs). All PPPs are operated by companies which are authorised by the financial regulator, the FSA. These normally are insurance companies and investment houses. In the case of SIPPs, some of these are operated by firms of Independent Financial Advisers (IFAs).
If one of the plan providers were to go into liquidation, the level of protection for the pension plan member depends on the nature of their investment.
Unitised Funds (except Unitised With-Profit Funds)
These funds are held under trust for the benefit of the investors, the unit holders. They are therefore not available to the creditors of the PPP provider and are not at risk by the provider going into liquidation or receivership. The nature of most of these Funds is that they are invested in Shares, UK or overseas, and they will be hit by downturns in the relevant markets. There is no protection against this type of fall in the value of your pension saving.
With Profit Funds (Unitised or otherwise)
These funds are only run by insurance companies. They are covered under the long-term insurance category, as follows:
- Unlimited.
- 100% of the first £2,000 plus 90% of the remainder of the claim.
Share portfolios
This would only be found in SIPPs. The beneficial ownership of the shares lies with the trustees who hold them, in trust, for the SIPP member. As such, if the SIPP provider were to go into liquidation, these assets are not available to the creditors of the provider and so the questions of loss and compensation should not arise.
Such investments are of course vulnerable to loss due to falls in the stock market. Individual shares can also become worthless because the company concerned has failed. There is no compensation to cover either of these situations.
Deposits
This is a more complicated situation due to the variation of practice by different providers. If the cash is held in a Bank in an account in the name to the individual plan (this is only likely to apply to a SIPP), the FSCS protection up to £50,000 will apply.
If the money is held in a provider's client account with a Bank, the FSCS protection comes into play. However, there is some legal uncertainty as to whether the £50,000 limit applies to the whole account or to each individual. If this situation applies to you, you had best ask your provider in writing to clarify the position in writing.
Finally, there will be situations where the deposit is held in an account with the provider. In this situation the FSCS protection will also apply, provided the PPP provider is authorised by the FSA which it ought to be (you must check if you are unsure about this). There are 2 uncertainties about this situation. It is possible that this will be treated as an investment rather than a deposit and so the £48,000 limit will apply. Also the legal status of the account could result in a situation where the appropriate limit will apply to the account as a whole rather than to each individual within the account. Given the uncertainties involved you must clarify the situation which applies to you with your provider.
Annuities
If the provider of your annuity were to go bust, you will qualify for compensation from the FSCS on the basis of the annuity being Long Term Assurance. The level of protection is unlimited and is calculated as 100% of the first £2,000 plus 90% of the remainder of the claim. The claim would be based on the value of the annuity and should include the level of spouse's benefits, inflation cover and other features that you have built into the annuity.
Occupational Schemes
These fall into 3 categories - defined benefit (also often known as final salary schemes), defined contribution schemes (often called money purchase schemes) and schemes which are some sort of mixture of the other 2 categories (usually referred to as hybrid schemes)
Defined Benefit Schemes
The protection for these schemes lies with the Pension Protection Fund (PPF), referred to above. However, protection only becomes applicable if your employer goes bust.
If monies are invested with an institution that goes bust, such as a bank or insurance company, the scheme trustees will need to make a claim to the FSCS. This will not affect your benefits from the scheme.
Defined Contribution Schemes
The nature of these schemes is that the member gets the benefits that can be provided by the money in the member's own account. The value of that account will rise and fall with the value of the investments.
Protection will only come into play where there is an involvement by a company authorised by the FSA and therefore covered by the FSCS. The extent of any protection will depend on the nature of the investment involved and will be treated in the same way as detailed above for PPPs. If you are unsure about your own situation you should seek clarification from the trustees. Again we strongly advise that this be done in writing.
Hybrid Schemes
The defined benefit element should be treated as above and qualify for the PPF while the defined contribution element should qualify, where appropriate for the FSCS compensation. However, the way these schemes are constituted varies and it is best to get confirmation from the trustees if you have concerns.
Additional Voluntary Contributions (AVCs)
Many members pay extra money into their occupational pension scheme to provide additional benefits when they retire. These contributions are known as AVCs. Sometimes they are used to buy additional service in the scheme and have the same security that applies to other benefits under a defined salary scheme.
More often, they are invested to make available an additional pot of money at retirement from which additional benefits can be provided. Regardless whether the scheme is a defined benefit or a defined contribution scheme, the security of this type of AVC will depend on how it is invested.
The particular area of concern is where the Trustees offer a cash deposit investment which is held in an account with a bank or building society. Because it is a single account (not separate accounts for each investor), the £50000 limit on compensation for deposits will apply to the account as a whole and not to each members individual account. This means that if the total amount in the account was £200000, compensation in the event that the deposit operator went bust (a very remote possibility), would be limited to £50000, resulting in each member's account being reduced by 75%. So, in this example, someone with £10000 invested, who would be unaffected if they had their own account, will find their investment reduced to £2500 due to being aggregated with other investors.