Government Pension Protection

Jansen_2

Does anyone know about the new law that was brought in on 6th April (in laymans terms) that protects a company pension if the company goes under and there is a shortfall??

Tried to look it up on the net but was totally blinded with gobblydegook

Pal

Yes.

See: http://www.thepensionservice.gov.uk/atoz/atozdetailed/fs1.asp

ianjemmett

If you go to BBC Radio 5's website & re-listen to the 5.30am programme for either 6th or 7th April, (sorry, I can't remember the exact day), there is an interview with the new head of the PPF.

As I understand it, all occupational schemes will be levied to create a fund that will take over the liabilities of schemes that become unable to meet their own liabilities. What assets are left in the defaulting scheme will also be transferred to the fund.

If my occupational scheme is badly managed/underfunded & becomes unable to meet its liabilities & your occupational scheme is run responsibly and successfully - no worries, the PPF can (& will - regularly) dip into your pot on my behalf. Remember when your scheme trustees used to make discretionary increases? They won't have as much money to dish out in future 'cos I'll be getting some.

Nice for me & a problem solved for the government (if it works, it's in serious trouble in the US) but I thought helping yourself to other people's property used to be called theft. Perhaps it's only theft if I do it because I happen not to write the laws.

Ian

Debt_Free_Chick

ianjemmett wrote:

As I understand it, all occupational schemes will be levied to create a fund that will take over the liabilities of schemes that become unable to meet their own liabilities. What assets are left in the defaulting scheme will also be transferred to the fund.

Kind of, yes. The Pension Protection Fund started on day one with no assets and no liabilities. When there is an insolvent employer with an insolvent pension scheme, then the assets and liabilities of that scheme will be added to the PPF. The PPF will also receive levies, to be paid by pension schemes outside the PPF i.e. continuing schemes that are not insolvent.

If my occupational scheme is badly managed/underfunded & becomes unable to meet its liabilities & your occupational scheme is run responsibly and successfully - no worries, the PPF can (& will - regularly) dip into your pot on my behalf.

But only if BOTH schemes are in the PPF. Over time, the PPF will be a pool of assets, made up from all the insolvent pension schemes admitted to the PPF. The PPF can not and will not "dip into" ongoing, solvent pension schemes.

Remember when your scheme trustees used to make discretionary increases? They won't have as much money to dish out in future 'cos I'll be getting some.

Two things - this will only happen if BOTH schemes are in the PPF. And increases will be limited under the PPF anyway. Ongoing, solvent pension schemes can still make discretionary increases, if funds permit. Schemes in the PPF will make pension increases, limited to 2.5% p.a.

Nice for me & a problem solved for the government (if it works, it's in serious trouble in the US) but I thought helping yourself to other people's property used to be called theft. Perhaps it's only theft if I do it because I happen not to write the laws.

Ian

There is no theft

Pal

Theft? Call it "insurance".

ianjemmett

Debt_Free_Chick wrote:

But only if BOTH schemes are in the PPF. Over time, the PPF will be a pool of assets, made up from all the insolvent pension schemes admitted to the PPF. The PPF can not and will not "dip into" ongoing, solvent pension schemes.

Are you suggesting that occupational pension schemes will have a choice about being in the PPF?

Of course PPF will dip into solvent schemes - via the levy.

Debt_Free_Chick wrote:

Two things - this will only happen if BOTH schemes are in the PPF. And increases will be limited under the PPF anyway. Ongoing, solvent pension schemes can still make discretionary increases, if funds permit. Schemes in the PPF will make pension increases, limited to 2.5% p.a.

My points are:

1. What is being launched here has been established for some years in the US and it's in deep trouble. Many millions of dollars in the red. So the ongoing liabilities are difficult to quantify and, like most things that emanate from government, the costs have a tendency to get out of control.

2. Whatever PPF provides has to be funded. Obviously, its liabilities will not be met by assets of defaulting schemes, otherwise the schemes would not default. PPF's funds will need to be topped up by funds from solvent schemes, the funds of which will not therefore permit the same sort of discretionary increases as they would if they were not being raided.

Debt_Free_Chick wrote:

There is no theft

Not in the criminal sense, of course. It comes down to how you define entitlement, I suppose.

Debt_Free_Chick

ianjemmett wrote:

Are you suggesting that occupational pension schemes will have a choice about being in the PPF?

Not really ... when an insolvency practitioner is appointed, he/she has a duty to inform the PPF if he/she believes the scheme is insolvent. The PPF will then assess the scheme (and this could take 12 months) to determine whether it meets the criteria of the PPF. However, only insolvent schemes enter the PPF. Ongoing solvent schemes remain outside of the PPF and the PPF has no say in the way they operate (although operation and governance is to be subject to new Codes of Practice, issued by the Pensions Regulator)

Of course PPF will dip into solvent schemes - via the levy.

I suppose it depends on your point of view, but the PPF will not be able to sieze the assets of solvent ongoing pension schemes in order to meet the liabilities of schemes inside the PPF. The PPF will issue notices for payment of the levy every year and the levies will be paid into the PPF (or at least, some of them). The levy does not depend on the solvency of the PPF, so if the PPF is insolvent, it will not send demands for payments to ongoing pension schemes. The levy comprises a scheme-based element, based on the liabilities of the ongoing scheme and a risk-based element, which we believe will be based on the scheme's investment strategy in relation to its liability profile. A scheme adopting a high-risk strategy is likely to pay a higher levy, to reflect the higher risk of insolvency.

My points are:

1. What is being launched here has been established for some years in the US and it's in deep trouble. Many millions of dollars in the red. So the ongoing liabilities are difficult to quantify and, like most things that emanate from government, the costs have a tendency to get out of control.

Agreed. It remains to be seen whether the PPF believes it can learn some lessons from the US experience. It doesn't automatically follow that the PPF will go the same way as the PBGC. Many of us learn from the mistakes of others

2. Whatever PPF provides has to be funded. Obviously, its liabilities will not be met by assets of defaulting schemes, otherwise the schemes would not default. PPF's funds will need to be topped up by funds from solvent schemes, the funds of which will not therefore permit the same sort of discretionary increases as they would if they were not being raided.

There is a fundamental difference in "funding" here. Schemes that are entered into the PPF are insolvent on a buy-out basis i.e. the assets would not secure an annuity for each member of the insolvent pension scheme. This does not, necessarily, create a deficit in the PPF. The reason being that the PPF will not be buying annuities in the same way as a scheme that is winding up. Instead, the PPF will allow the scheme to continue to operate as if it were continuing i.e. not winding up. In this way, securing each member's entitlement will occur over a period of time, rather than having to happen "in bulk" on wind-up. It's the difference between a "forced sale" and a "going concern".

As an illustration, I understand the Rover scheme has a deficit of £400m on a buy-out basis, but only £67m on an ongoing basis. Of course, it suits the media to publicise the higher figure only. They are not wrong - the Rover scheme does have a £400m deficit on wind-up, but this will not translate in to a £400m deficit for the PPF.

Whilst the scheme is operating as a "going concern" there is the opportunity to limit the outflow of payments i.e. payments relate to benefits for those who are entitled to them. For example, let's say that a member has an entitlement to a pension of £10,000 p.a. If the scheme were being wound up, then it would have to buy an annuity - let's say this would cost £300,000. The PPF doesn't have to pay out £300,000 to buy an annuity, instead it pays out £833.33 each month to the member, as a pension. If that member dies soon after retirement, then the PPF will have retained much of the liability - if the annuity had been bought by the trustees of the scheme on wind up, then the insurance company would have retained much of the £300,000!

Not in the criminal sense, of course. It comes down to how you define entitlement, I suppose.

Whichever way you look at it, other than the payment of the levy, solvent ongoing pension schemes will not be raided to meet the liabilities of the PPF.

Regards

ianjemmett

Thanks for the further elucidation. On the point of learning from the mistakes of others, it does happen, I agree but, when it comes to politicians I think whoever said 'History teaches us that history teaches us nothing' got it about right, generally. They don't have to act like people who are going to be around to pick up the pieces so short-termism tends to dominate.

Ian

Debt_Free_Chick

ianjemmett wrote:

when it comes to politicians I think whoever said 'History teaches us that history teaches us nothing' got it about right, generally. They don't have to act like people who are going to be around to pick up the pieces so short-termism tends to dominate.

Ian

Very true. We can but hope. If this and future Governments continue to hit the "good uns" though, there will be no pension schemes left to fund the levies! Then, I suspect, it will simply become a matter of extra taxation.

Glad you found the info useful. I've worked in the business (as a Pensions Manager) for more than 25 years, so this is a subject of professional, as well as personal, interest.

In case you don't know the PPF has a website here

http://www.pensionprotectionfund.org.uk/