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This publication is available at https://www.gov.uk/government/consultations/changes-to-the-pension-protection-fund-ppf-compensation-regulations/changes-to-pension-protection-fund-ppf-compensation-regulations-public-consultation
This consultation concerns proposed amendments to the Pension Protection Fund (Compensation) regulations 2005 (S.I.2005/670), modifying schedule 7 of the Pensions Act 2004. The proposed regulations are intended to clarify that where a person has rights under an occupational pension scheme to a certain type of fixed pension (“a relevant fixed pension”) that was derived from service in another scheme, this is to be treated as attributable to pensionable service for the purposes of calculating Pension Protection Fund (PPF) compensation, including the application of the PPF compensation cap.
By “relevant fixed pension”, we mean a pension which arose by virtue of a transfer payment to the scheme, where the initial amount of the pension was determined at the time the transfer payment was received and which is not attributable to a pension credit, or payable as a result of a person’s death.
A recent High Court judgment1 has resulted in the legislation being interpreted inconsistently with the policy intent and in a way that does not reflect PPF practice in cases where a person has benefits derived from such a pension. In particular, the judgment means that such benefits are not attributable to pensionable service in the scheme in question and thus cannot be aggregated with other relevant pension benefits which are derived from pensionable service for the purposes of applying the compensation cap.
The judgment principally considered relevant fixed pensions only in the context of the PPF compensation cap but, in government’s view, it would also lead to a number of wider perverse and unintended outcomes for a range of individuals, including some in receipt of survivor benefits. The judgment could result in individuals whose PPF compensation was derived, wholly or in part, from a relevant fixed pension seeing their payments reduced, and in some cases, stop altogether. The government believes that this is unfair and was never the intention when the legislation was amended in 2014.
Given the significant negative implications that the judgment would have for some individuals, the government is proposing to bring forward legislation to remedy the immediate problems caused by the judgment, to ensure that the PPF can continue to administer the compensations regime as intended.
Primary legislation would be required to fully remedy the problems created by the judgment and the government will seek to bring this forward at the earliest opportunity to ensure that the PPF compensation regime operates fully as intended to everyone who would otherwise be affected.
The government is also proposing in these regulations to take this opportunity to bring the definition of “pensionable service” in the Pension Protection Fund (Compensation) regulations 2005 in line with the definition in paragraph 36 of Schedule 7 to the Pensions Act, as modified by the proposed regulations.
About this consultation
We would expect this consultation to be of interest to pension scheme trustees and administrators of defined benefit (DB) occupational pension schemes, PPF levy payers, those receiving PPF compensation, and the PPF Board itself. However, the government welcome views from any interested parties.
Purpose of the consultation
The aim of the consultation is to seek views on whether the Pension Protection Fund (Compensation) (Amendment) (No.2) regulations 2018 restore the policy intention for the PPF, by ensuring that a relevant fixed pension is regarded as attributable pensionable service for the purpose of calculating PPF compensation, including the application of the PPF compensation cap where relevant.
The government would also welcome views on the implications of the government’s proposed regulations, including any possible unintended consequences.
The government’s underlying policy in relation to the cap is not part of this consultation.
Scope of consultation
This consultation applies to England, Wales and Scotland. It is anticipated that Northern Ireland will make corresponding regulations.
Duration of the consultation
The consultation period begins on Tuesday 3 July 2018 and will run until Tuesday 24 July 2018.
How to respond to this consultation
Please send your consultation responses to:
Private Pensions Policy and Analysis
First Floor, Caxton House
We will aim to publish the government response to the consultation on GOV.UK. The consultation principles encourage departments to publish a response within 12 weeks or provide an explanation why this isn’t possible. Where consultation is linked to a statutory instrument, responses should be published before or at the same time as the instrument is laid.
The report will summarise the responses and any action we will take, or have taken, in respect of them.
How we consult
This consultation is being conducted in line with the revised Cabinet Office consultation principles published in January 2016. These principles give clear guidance to government departments on conducting consultations.
Feedback on the consultation process
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DWP Consultation Coordinator
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The Pension Protection Fund
The PPF was established by the Pensions Act 2004. It provides compensation to members of defined benefit (DB) occupational pension schemes where the sponsoring employer has suffered a qualifying insolvency event on or after 6 April 2005 and the funds in the scheme are insufficient to buy annuities that would pay pensions at, as a minimum, PPF compensation levels.
The PPF is funded via a combination of the transferred scheme funds, recoveries from insolvent employers, investment return and a levy on eligible schemes. Following an employer insolvency event, the scheme enters a PPF assessment period during which the scheme continues to be run by its trustees but benefits are limited to PPF compensation levels. If a scheme has sufficient assets to purchase annuities of at least PPF compensation levels, it leaves PPF assessment and winds up as normal. If the scheme does not, it will transfer into the PPF and scheme members will be paid compensation.
The PPF compensation regime
PPF compensation is paid at 100% of the pension due for individuals over their scheme’s normal pension age (NPA) at the date of employer insolvency event. The PPF generally also pays 100% compensation to those who have retired on legitimate ill-health grounds, regardless of age, and those receiving a pension in relation to someone who had died at the time that the employer became insolvent. Individuals below their schemes NPA will receive compensation based on 90% of their accrued pension benefits, subject to an overall cap.
The compensation cap
The cap limits the amount of PPF compensation to which an individual is entitled. It is intended to limit the costs of the PPF and thus the burden on levy payers, and mitigate against moral hazard.
The cap is set as at age 65 and actuarially reduced if a person takes their compensation earlier, so people who take their compensation at different ages are treated fairly. The cap is increased annually in line with inflation and, at 1 April 2018, the cap at age 65 is £39,006 (this equates to £35,105 when the 90% restriction is applied).
The increased cap for long service was introduced on 6 April 2017 and applies to individuals who have 21 or more years’ pensionable service. For these individuals the cap is increased by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
Indexation and revaluation
PPF compensation based on benefits accrued after 6 April 1997 is increased annually in line with inflation (or indexed), subject to a maximum of 2.5%. This reflects the legal requirements placed on pension schemes.
Revaluation is the term used to describe how PPF compensation not yet in payment reflects any inflation from the date the compensation was calculated until the compensation is put into payment. Revaluation for the period prior to PPF assessment is conducted in line with the rules of that particular pension scheme. After the schemes assessment date any revaluation will be in line with PPF’s rules.
Eligible spouses and, civil or relevant partners are generally entitled to 50% of the total compensation the deceased member was receiving prior to their death. Where the member dies before reaching their scheme’s NPA, their spouse, civil partner or relevant partner may be entitled to receive 50% of the compensation the deceased member would have received had they reached their scheme’s NPA before they passed away. Once a former member’s spouse, civil partner or relevant partner begins to receive PPF compensation, they will continue to receive it for the rest of their life.
Surviving dependent children will also be entitled to PPF compensation but only up to the age of 23 and while they are in full-time education. Dependent children with a disability are entitled to compensation at any age.
PPF compensation and relevant fixed pensions
The definition of pensionable service in Schedule 7 to the Pensions Act 20042 is fundamental to the calculation of PPF compensation. Amongst other things, it governs the restriction to 90% for those under their scheme’s NPA, the total benefits which are subject to the compensation cap, survivors’ benefits, and which benefits should be subject to indexation and revaluation.
Currently, when a pension scheme enters the PPF, in accordance with the policy intent, the Board treats benefits derived from a relevant fixed pension and those derived from pensionable service within the scheme alike. This is irrespective of whether the benefits:
(i) are based on actual pensionable service under the relevant scheme, or
(ii) have been the subject of a transfer-in from another scheme.
For the purposes of applying the compensation cap, Schedule 7 provides that the annual value of pension benefits attributable to an individual’s pensionable service in the relevant scheme should be aggregated with the annual value of pension benefits attributable to a person’s pensionable service under a connected occupational pension scheme.
The High Court judgment
In the High Court case of Anthony Beaton v The Board of the PPF, the Appellant contested how the PPF compensation cap should apply to his compensation. This was on the basis that his relevant fixed pension was derived from a transfer into a predecessor scheme and was therefore not attributable to his pensionable service within the pension scheme that subsequently transferred into the PPF. The result, he contended, was that his relevant fixed pension should be treated separately from his pensionable service within the scheme and, therefore should be subject to its own cap.
The judge decided that, for the purposes of paragraph 26 of Schedule 7 to the Pensions Act 2004 (the compensation cap), the Appellant’s relevant fixed pension arising from the transfer payment was not “attributable to his pensionable service” under the relevant scheme and therefore could not be aggregated with his main pension for the purposes of the cap. The result is that his relevant fixed pension, and anyone else in the same situation, must be treated separately for the purposes of applying the compensation cap, resulting in an increase in PPF compensation payments.
The judgment considered paragraph 26 of Schedule 7 of the Pensions Act 2004, as amended by section 51 of the Pensions Act 2014. This was intended to make it clear that separate compensation caps should apply to an individual’s “pensionable service benefits” and “pension credit benefits” so that a divorcee would not find his or her “pension credit benefit” eroded by “pensionable service benefits” earned separately in their own right and vice versa. It was not intended that a pension derived from a relevant fixed pension such as the Appellant’s should be treated differently to other pensionable service.
Implications of the High Court judgment
In terms of the compensation cap, the practical implication of the judgment is that where a relevant fixed pension is derived from a transfer from another occupational pension scheme, these benefits cannot be combined with any other pensionable service that the individual has in the same or connected schemes. As a consequence the benefits resulting from the transfer would be treated separately, and attract their own compensation cap where appropriate. This would mean that people with a relevant fixed pension derived from a transfer could receive more PPF compensation than someone whose pension benefits were made up entirely of actual pensionable service within the scheme. This would also mean that PPF would not be treating individuals consistently, and would not be in line with the policy intent for the fund, which is to treat PPF individuals in a fair and consistent manner.
However, the judgment has implications beyond the application of the compensation cap because the phrase “attributable to pensionable service” is used throughout the compensation provisions in Schedule 7 of the Pensions Act 2004. It follows that if a relevant fixed pension is not attributable to pensionable service for the purposes of the compensation cap, it is not attributable for other purposes, some of which would have significant detrimental implications, including for some vulnerable groups. In particular:
Survivor benefits – except in the case of members in active pensionable service at the start of the PPF assessment period, the spouse or civil partner of a member with a fixed pension who dies after the start of the assessment period would no longer be entitled to any survivors’ compensation in respect of that pension. This would also be the case for dependant children who would be eligible for survivor benefits.
Indexation – Schedule 7 provides that annual increases in compensation to reflect inflation are only payable in respect of benefits which are attributable to pensionable service (see paragraph 28). This means individuals would not receive annual increases to reflect inflation in respect of any compensation derived from a relevant fixed pension.
Revaluation – increases to reflect inflation during the period where compensation is deferred are calculated by reference to benefits being attributable to pensionable service. If benefits derived from a relevant fixed pension transfer are not attributable to pensionable service then active and deferred members below NPA at the start of the PPF assessment period would no longer be entitled to have their compensation in respect of a fixed pension revalued to reflect inflation between the start of assessment and reaching NPA (see paragraphs 12, 16 and 17 of Schedule 7).
The individuals outlined above would all see their PPF compensation payments reduced where their compensation was derived from a relevant fixed pension, and in some cases, compensation payments could stop all together.
Changes to ensure consistent treatment
When the PPF was set up in 2005 it was never intended that people with pension benefits which were derived from a relevant fixed pension should be treated differently to those whose pension benefits were derived from pensionable service within their original pension scheme or a combination of these. The intention has always been to treat individuals within the PPF in a fair and consistent manner.
Given the significant negative implications that the judgment would have for some individuals, the government is bringing forward legislation to remedy the immediate problems caused by the judgment. The attached proposed regulations are intended to clarify that relevant fixed pensions which are derived from a transfer fall within the definition of pensionable service for the purposes of calculating PPF compensation, including the application of the compensation cap.
The proposed regulations are intended to ensure that the PPF has the legal basis to pay compensation and inflation related increases in compensation in respect of such pensions to eligible individuals and can continue to administer the compensation regime as intended. In particular, the proposed regulations are intended to prevent vulnerable people suffering a reduction in their PPF compensation payments or even seeing them stopped all together.
Who will be affected?
The proposed changes will apply to individuals whose PPF compensation is derived wholly or partly from a relevant fixed pension transfer from the date the proposed regulations come into force and potentially affect:
- pensioner members
- deferred members
- the spouses and other dependants of pensioner and deferred members
The proposed regulations
Draft regulation 2(3) inserts new regulation 30 into the PPF (Compensation) regulations 2005. New regulation 30(3) modifies paragraph 36 of Schedule 7 to the Pensions Act 2004 in its application to certain schemes (as identified in new regulation 30(2)).
Paragraph (1) of the new regulation 30 provides that the modifications apply to a scheme if, immediately before the PPF assessment date, a person is entitled or has rights to a “relevant fixed pension” as defined in paragraph (2) of new regulation 30. A relevant fixed pension is defined as a pension which arose by virtue of a transfer payment to the scheme, where the initial amount of the pension was determined at the time the transfer payment was received. In addition, the pension must not be attributable to a pension credit, or payable as a result of a person’s death.
The proposed regulations modify paragraph 36 by inserting the new sub-paragraph (6), to prescribe that where a person has a relevant fixed pension, the person is to be treated for the purposes of Schedule 7 as having notional pensionable service under paragraph 36(4)(b), to which the relevant fixed pension is attributable.
This is intended to restore the government’s policy intent for the PPF, and in particular will ensure that the PPF can, where applicable:
- apply the compensation cap and reduction to 90% for those already receiving their pension, who were below NPA at the assessment date;
- aggregate benefits for the purpose of applying the cap in relation to deferred and active members below NPA at the assessment date;
- pay survivor benefits to vulnerable groups such as widows or widowers’ and eligible dependant children;
- revalue PPF compensation which is not yet in payment; and
- apply inflationary increases to compensation payments.
In addition, the modification in draft regulation 30(4) describes how the accrual rate is to be awarded to the individual in relation to a relevant fixed pension. Specifically:
1) Regulation 30(4)(a) details the accrual rate entitlement for an eligible member under paragraph 15 of Schedule 7 in respect of a relevant fixed pension. The accrued amount is the initial rate of pension the individual would have been entitled to if they had reached NPA immediately after the transfer payment. This would be the amount transferred to the scheme, which gave rise to the relevant fixed pension. The intended effect is that the accrued amount will be treated as the amount of the relevant fixed pension that was originally awarded.
2) Regulation 30(4)(b), when read together with regulation 14, modifies paragraph 16 of Schedule 7 of the Pensions Act 2004 to provide that for the purposes of calculating the deferred member’s compensation, the accrued amount is to be revalued over the first revaluation period (from the date their pensionable service ended until the assessment date) in the same way it would have been revalued under their scheme. In relation to relevant fixed pensions, it would otherwise be unclear when the individual’s notional pensionable service should be regarded as having ended (and so when the first revaluation period should start). The modification provides that the first revaluation period starts when the transfer payment is received.
Defining pensionable service
There is more than one definition of ‘pensionable service’ within pensions’ legislation.
Section 70 of Pension Schemes Act 1993 (the 1993 Act) states that service which is notionally attributable for any purposes of the scheme cannot be regarded as pensionable service. Whereas Schedule 7 of the Pensions Act 2004 (the 2004 Act) provides that ‘pensionable service’ means:
- actual service in any description of employment to which the scheme applies which qualifies the member for benefits under the scheme, and
- any notional service allowed in respect of the member under the admissible rules which qualifies the member for such benefits
In developing the proposed regulations, we have taken the opportunity in regulation 1(2) to delete the 1993 Act definition of “pensionable service” from regulation 1(2) of the Pension Protection Fund (Compensation) regulations, 2005. The intended effect is that the definition of pensionable service in paragraph 36 of Schedule 7 to the Pensions Act 2004, as modified by the proposed regulations, will automatically feed through and apply for the purposes of the Compensation regulations. This is by virtue of section 11 of the Interpretation Act 1978. The government has not identified any case in which the 1993 Act definition needs to be retained in the Compensation regulations, but would welcome comments on this approach.
Do the regulations as currently drafted achieve the policy intent as outlined in this consultation document?
Are you aware of any potential unintended consequences for individuals or the PPF resulting from the proposed regulations?
Subject to sub-paragraph (5), “pensionable service” means— (a) actual service in any description of employment to which the scheme applies which qualifies the member for benefits under the scheme, and (b) any notional service allowed in respect of the member under the admissible rules which qualifies the member for such benefits.