Is your pension protected?
The recent recession has seen the collapse of many businesses with more predicted. Up until now, company insolvency has meant that employees of the firm would walk away with pretty much nothing, including most if not all of the money invested in the employer defined benefit pension scheme.
This has prompted the UK government to introduce the Pension Protection Fund (PPF) in the 2004 Pensions Act, which protects the members of eligible employer defined benefit pensions should the company become insolvent. Although this is a government-sponsored institution, it's the employers who actually fund it by way of an industry levy.
Naturally, this leaves the fund in a precarious predicament during this economic downturn.
The effect of the recession on the PPF( pension protection fund ) is two-fold.
Firstly, there has been a great increase in the number of firms that are currently seeking recourse from the PPF to compensate their previous employees. It is estimated that the collapse of Nortel Networks, Woolworths and Wedgwood alone will cost the fund £500 million, on top of the existing pension assets of the companies seized by the PPF.
Secondly, with more companies undergoing administration it means fewer contributing to the levy. This in turn means a small pool of resources for the fund to draw from. This has led to concerns that the PPF might not be able to pay out if a large number of companies become insolvent.
As of October 2008 the fund was already £517 million in deficit and given the current pension forecasts this is sure to have become worse in the 6 months since.
Is the pension protection fund working for your pension scheme?
So what are they proposing to remedy the institution that is meant to save employee pensions?
One option is the raising the levy on enrolled schemes, which will be another reason for companies to close their defined benefit schemes and switch to the less generous defined contribution pension. The other is that the level of protection for pensioners and those approaching retirement could be reduced even further.
Currently, compensation is set at a maximum of £27,000 a year for those aged 65 and above. This is reduced to £21,000 a year if you are 50 when your employer claims insolvency. This contingency measure is already permitted by the legislation that established the PPF, and could see up to a 15% reduction in cover.
Either way, it is the pensioner that will be lumbered with the consequences, which seems to be a complete contradiction to the initial purpose of the PPF and just another example how the current pension management cannot be relied upon to guarantee your way of life after retirement.