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Last Updated: Tuesday, 5 April 2005, 23:03 GMT 00:03 UK
Q&A: Pension Protection Fund
A pensions march last year
Separate help is available for pension wind-up victims
Workers' pension rights should receive a boost on Wednesday when the Pensions Act 2004 comes into force. The headline-grabbing measure is the Pension Protection Fund (PPF), which aims to compensate workers who lose their pensions when their employer goes into liquidation.

What is the PPF and how will it work?

The PPF is essentially an insurance plan, which all final salary pension schemes must belong to.

Its existence should ensure that members of final salary schemes get their pension if their employer goes under.

A pension scheme can resort to the PPF if it does not have enough money to pay its members' pensions.

Retired scheme members will receive 100% of their pension, while members still of working age should get at least 90% of the pension they were due to receive when they retired.

People who take early retirement can however only get a maximum of 25,000 a year.

Hence, people who have built up a large company pension and want to retire early may lose out if their employer goes under.

Who pays for this safety net?

The pension schemes themselves will pay for the PPF.

A final salary scheme will face an initial flat charge of 15 for each employee or pensioner member. The scheme will face a 5 charge for each scheme member with a deferred pension. The scheme may or may not pass this cost on to members.

This way, the PPF will collect an estimated 150m in its first year.

Future charges will depend on the risks of the individual scheme.

Members of an underfunded scheme will pay more to the PPF than members of a scheme whose finances are in good shape.

Critics of the PPF fear that if a major pension scheme was to wind-up, then the PPF's reserves could be eaten up in one go.

Why is the PPF needed?

The combination of poor stock market performance and the fact that many firms have cut the amount of money they pay into their employees' pensions has led to a crisis in workplace retirement provision.

The crisis has been most keenly felt by members of final salary pension schemes - where the size of the pension income depends on length of service and the member's final salary.

The majority of these schemes are now closed to new employees. Others have been found to be in deficit and some have been wound up.

Under current rules, when a pension scheme is wound up, its members of working age have little to show for years of contributions. An estimated 60,000 employees have found themselves in this position.

Their plight prompted the government to introduce the PPF.

I am a victim of a pension wind-up - what help can I receive?

The PPF will not act retrospectively. However, last May the government said it would set aside 400m to pay the pensions of wind-up victims over the next 20 years.

However, this Financial Assistance Scheme (FAS) comes with even more strings attached than the PPF.

Payouts are capped at 80% of the expected pensions, up to a maximum of 12,000 a year.

In addition, people who have to fall back on the FAS will not receive any money until they have reached the age of 65.

Last autumn, the Institute of Actuaries said that the compensation package was nowhere near large enough to replace the money people had lost. It said it was only large enough to pay victims a pension of 10 a week.

Unions and pressure groups have called for a more generous compensation package.

Are there other pension measures, apart from the PPF, coming into force?

Yes. Other major changes to UK pensions will come into force on Wednesday.

For the first time, people will be able to defer taking their state pension and get a lump sum or an enhanced state pension when they eventually retire.

The Treasury has estimated that a person who defers their state pension of about 100 a week for five years would ultimately see their weekly pension rise to about 152 a week.

OPRA, the current pension scheme regulator, will be replaced with a new regulator with greater powers, who will be able to demand that schemes are properly funded.

The new pensions regulator wants scheme trustees to push employers to close scheme deficits.

More changes, including a cap on the size of an individual's pension pot that can attract tax relief, are planned for 2006.


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