Final salary pension protection limit to rise for long serving workers
Long-standing members of collapsed final salary schemes will be able to claim higher levels of compensation from the Pension Protection Fund next year.
From April 2017 the compensation limit will increase by 3% a year for every year of service beyond 20 years. This will be subject to an overall cap that is twice the standard limit.
Currently the maximum that can be claimed from the PPF is £33,678 a year. However, this limit can penalize long serving employees as it treats them in the same way as higher earners who have not been in the scheme so long.
The terms of the Financial Assistance Scheme, the predecessor of the PPF, will also be updated from 2018.
Tom McPhail, head of retirement policy at Hargreaves Lansdown says: “This will deliver more graduated benefits, making a distinction between long serving middle-earning employees and those fortunate higher earners who have hit the cap after only a few years’ service. It will inevitably have some knock-on effect on the funding of the PPF. However, the scheme is in surplus and they should be able to adjust to accommodate this without any significant disruption.”
Providing compensation for members of final salary pensions that have collapsed, the PPF is funded by a levy the schemes it protects. People who had already retired or reached the normal retirement age at the time the scheme went bust get 100% compensation.
Those who have not retired or reached their normal retirement age (for example who took early retirement) are only entitled to 90% compensation subject to a cap. The maximum cap of £33,678 only applies to 65-years old with the limit gradually reducing for younger workers. The cap for a 40 year old for example is around £22,500.
Following the collapse of the BHS pension a group of MPs is investigating issues around pension scheme funding and the sustainability of the PPF. Mr McPhail adds: “Looking ahead, questions remain about the stability and sustainability of final salary scheme funding and how that interacts with the Pension Protection Fund. We expect to see these issues explored as part of the DWP select committee enquiry.”
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.