Employers with high-risk schemes will have to pay a higher levy if they want to reap the benefits of the proposed Pension Protection Fund (PPF), but not until the second year the legislation is in effect, says Andrew Smith MP, Secretary of State for work and pensions.
According to a factsheet explaining the Pensions Bill published today, at least 50% of the levy for the PPF will be linked to risk factors, such as levels of under-funding, credit ratings and investment strategies.
This means funding costs will be minimised for "good employers" while well-funded schemes will want to use the Fund to protect their members from future mishaps.
However, in the first year of operations, the funding of the PPF will be solely linked to scheme factors, such as numbers of members and the balance between active and retired members.
What is not clear is how PPF funding will be linked in the first year to administration and the fraud compensation levy (which replaces the existing Pensions Compensation Board levy).
The goal of the PPF is to protect occupational scheme members whose schemes are wound up before they reach retirement age. Under existing rules people could have saved all their working lives, but been left without a pension when, e.g., employers went insolvent.
Smith says the introduction of the Fund will ensure this will "never happen again".
The PPF will make sure members receive "the core of the benefits to which they are entitled", with people who have reached the scheme’s pension age receiving 100% of the original pension promise. People below the stated retirement age will be provided compensation covering 90% of the benefits, subject to an overall benefits cap, which will be calculated using a mixture of the schemes individual rates and standardised rules linked to earnings.
Pension payment on rights built up after 1997 will also be indexed in line with the Retail Price Index (RPI) capped at 2.5%, with deferred rights capped at 5%, to ensure PPF compensation retains its value over time, the DWPsays.
The government says it is taking steps to reduce the costs and burden of the PPF levy on employers and schemes, through "measures" included in the Pensions Bill, which the DWP says will lead to unspecified savings of "£130m".
However, the government already admits that employers may not be able to afford the PPF levy, by stating the PPF board may borrow commercially on a short-term basis if cash-flow difficulties should arise.
The Fund, which the DWP aims to bring into effect from April next year, will not be retrospective.
The DWP states: "The PPF, however, is an insurance scheme and no insurance scheme can cover against events that have already happened."IFAonline
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