The Pension Protection Fund – A Lifeboat with Holes in it?
With the high-profile collapse of Thomas Cook being confirmed, it leaves some two and a half thousand members of their Defined Benefit (DB) Pension Scheme with uncertainty and questions that need answering. After all, this is not what you want to see when you are checking the website that looks after your pension scheme:
The most likely outcome for these members is that the Defined Benefit (DB) portion of the pension scheme will go into a lifeboat type scheme known as the Pension Protection Fund.
The Pension Protection Fund is a scheme that was set up in 2005 as a last-resort style safety boat for the DB schemes of companies that have collapsed. Although the scheme was a government initiative, it is not funded or backed by the government. Instead, it is funded by charging a levy, like an insurance premium, to all qualifying DB Schemes. What this means is that all the surviving pension schemes are funding the lifeboat. It is also funded by bringing in assets from the DB portions of failed companies.
If your pension has fallen into the PPF, you will receive a reduction in value of your income payments to around 90%. There is also a cap on the amount you can receive, depending on your age.
In their latest figures announced earlier this year, the PPF stated that their assets grew to a record amount of £32bn, but its funding levels dropped. This was due to accepting the large deficit that the Kodak Pension Scheme ran, into its pool of assets. That specific scheme had 11,000 members and a deficit of £1.5bn. The current funding level for the PPF stands at 118.6%, meaning that the assets they currently hold outweigh their liabilities by £6.1bn. This level has dropped from £6.7bn in the last 12 months.
So how safe is the PPF?
This scheme is being funded by active Defined Benefit Pension Schemes but more and more of these schemes are falling into the PPF. Therefore, they are no longer paying their levies, which in turn decreases its funding levels and increases its liabilities at the same time. It seems like it is only a matter of time before the PPF itself is going to fall into a huge deficit.
The overall pension deficit in the UK currently stands at £48bn. That means that the PPF only has the capacity to take on 12% of the UKs deficit before falling into trouble itself. It already looks after 249,000 members and has the following high-profile pension schemes on its books:
- Arcadia Group
- MG Rover
- Lehman Brothers
- UK Coal
- Scottish Electric
- Toys ‘R’ Us
- Thomas Cook?
What can you do to ensure the safety of your pension scheme?
I would encourage everyone that is involved in a Defined Benefit Pension Scheme to conduct a full health check of your current scheme to ensure you receive the maximum possible income in retirement. If you have concerns over your scheme, it could be worth taking control of your pension and moving your funds into a private arrangement.
If you would like advice on how to complete a full safety check on your current scheme and benefits, feel free to get in touch and we can guide you through the process.