Press release

Government to increase pension compensation for long-servers

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The amount of money which long-serving staff can receive in retirement if their company folds is set to increase.

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The amount of money which long-serving staff can receive in retirement if their company folds is set to increase, the Minister for Pensions has announced.

Long service is not currently taken into account when a person whose defined benefit pension scheme collapses and is then taken over by the Pension Protection Fund (PPF). The government is to increase the maximum level for those receiving capped compensation by 3% for every year of service over 20 years.

This means someone who has contributed to a pension scheme for 40 years and accrued a pension of £50,000, only for the scheme to wind up and have insufficient funds to pay out, would receive £45,000 – rather than the current capped amount of £31,380.

Minister for Pensions Steve Webb said:

People whose employer becomes insolvent can already get compensation when they retire through the PPF. But the scheme does not recognise the long service of those who were members of their pension scheme for over 20 years.

It cannot be right that someone who has been with a company for much of their working life – and relies heavily on that for their pension income – gets the same in compensation as someone with far shorter service and who could also have other pension income to fall back on.

I want to ensure that those who are or could be affected will in future have their long service recognised in the form of higher compensation.

The decision comes after a review of how the PPF compensation cap operates, following the collapse of car parts firm Visteon in 2009.

More information

Read the Written Ministerial Statement about changes to the compensation cap.

Today’s announcement means those members of pension schemes for more than 20 years will have the cap on their compensation raised by 3% for each year above 20 years.

The Pension Protection Fund provides compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event for the employer, and where there are insufficient assets in the pension scheme to cover the PPF level of compensation.

To benefit from the cap increase, the person’s pension scheme must be a defined benefit scheme and eligible to enter the PPF.

The PPF pays two levels of compensation. Anyone over their scheme’s pension age whose scheme’s employer goes through insolvency gets compensated 100%, uncapped. But anyone who is under scheme pension age at that point is entitled to 90% compensation, which is capped where relevant.

Those who stand to gain extra compensation will either already be in receipt of capped compensation or would have their pension capped when they come to pensionable age.

They will also need to have been a member of a scheme for 21 years or more when the scheme transferred to the PPF.

The revised compensation cap will not be backdated: anyone covered by this change who is already in receipt of capped compensation will get the increase from the date the relevant legislation is in place.

The revised cap will also affect any scheme that does not enter the PPF, but only where it begins to wind up or enters the PPF assessment period after the revised cap is introduced.

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Published 25 June 2013