How the Pension Protection Fund Works



Posted on: 25th August 2016

The unfortunate demise of BHS threw the Pension Protection Fund back into national headlines, with the pension fund of the business having entered the PPF. Unsurprisingly, it was a move that worried many of the brand’s workers, who feared that due to circumstances beyond their control, their benefits may be significantly reduced.

In reality, the truth is that yes – some BHS workers will lose out by way of reduced savings following the brand’s collapse. However, those that are already in retirement and have begun accessing their funds will not face any reductions or caps.

In general, retirees’ pensions are for the most part protected by the PPF – the vast majority of members facing the prospect of no more than a 10% reduction. Nevertheless, some of those in much wealthier brackets may find themselves considerably worse off due to the PPF having taken over.

The Pension Protection Fund works a little like this:

When a company goes bust and pensions are passed over to the PPF, those under retirement and still working will no longer earn additional benefits. However, the total sum that was in their pension pot at the time the business folded will continue to grow in accordance with inflation.

Upon retirement, their pension’s annual value is capped at the scheme’s retirement age level. The pension holder will receive either 90% of the level for their age or 90% of the pension’s annual value – whichever of the two is lower.

For example – a BHS employee is 55-years-old and currently has a pension worth £37,000 annually and intends to retire at 60. A £31,439 cap has been set on that age, which means that he’ll most likely get 90% of £31,439, which comes out at £28,295 per year. The PPF alters its caps on a regular basis in accordance with average earnings, so chances are it would not be exactly the same by the time he retired at 60.

At the other end of the scale, any employee with an annual pension that falls below the PPF cap would not be affected by the cap. If an employee of the same age had a pension valued at £15,000 annually, they would be eligible for 90% of this which is £13,500. As the figure is below that of the cap, their retirement income would not be influenced by it.

As for those who are already retired and receiving retirement income, the collapse of the company will not make any difference to the amount they receive. No PPF caps will apply and their annual income will remain the same. However, those who retired early from the company and remain under the standard retirement age may still be subjected to PPF caps.

If you are having any difficulties or worrying how you may be affected by this or a similar situation, independent financial advice can help shed light on your options. For more information or to book a consultation, get in touch with the Haven IFA team today.