How is your business effected by the Pension Protection Fund?
The PPF was set up as a compensation scheme to deal with shortfalls where there is a pension deficit, particularly relating to a defined benefit scheme. A defined benefit scheme means that the recipient is entitled to a defined annual sum under their pension each year through employer contributions. The employer is responsible for ensuring that sufficient funds are available in the pension pot to make these payments.
Where a pension deficit arises, there are insufficient funds to pay all of the employees their pension entitlements. In a company that is still trading and is generally profitable, a pension deficit is less of an immediate issue. Through the ongoing trade, the company will continue to make regular pension contributions ensuring that retired employees are catered for as funds are required. In those circumstances, the deficit becomes an issue when looking to sell or close the business, which can lead to insolvency.
When a company declares insolvency, and there is a significant pension deficit, is generally when problems with a pension deficit arises. In formal insolvencies, the Pension Protection Fund can step in to take a claim in the liquidation or administration for the shortfall to the pension scheme. By doing so, this ensures that employees still receive their pension entitlements although this may be at a reduced amount.
How will the Pension Protection Fund get involved?
Where a company enters liquidation or administration and operates a defined benefit scheme, the PPF will, generally, be the biggest creditor. As they are a compensation scheme, they are specifically tasked with increasing recoveries from the insolvent estate to reduce the pension deficit. The PPF will look to be involved in matters including:
- Agreeing on the level of the insolvency practitioner’s fees.
- Considering administrator’s proposals, particularly relating to pre-pack sales.
- Pushing potential legal actions in relation to a director’s conduct.
- Reviewing any arrangements for the restructuring of your company.
It is, therefore, important to provide information to your insolvency practitioner of the position regarding the pension scheme in your initial conversations. This will allow them to actively engage with the Pension Protection Fund. The insolvency practitioner can then quickly make a declaration as to whether the pension scheme can be rescued, or whether it will be necessary to compensate employees from the Pension Protection Fund.
How is Pension Protection Fund compensation calculated?
When a company enters liquidation or administration the insolvency practitioner will file an S120 notice with the pension scheme trustee, the pensions regulator and the pensions protection fund. If all contributions are up to date, no further action will be taken, and members of the scheme will be able to draw on the scheme as normal.
If there is a pension deficit, the scheme will enter what is known as an assessment period. Following this, the insolvency practitioner will give notice as to whether the pension scheme can be rescued, or whether the scheme has failed and will be fully converted to a pension protection fund scheme. Compensation is paid throughout the assessment period and after conversion depending on your circumstances.
If you have reached retirement age and are retired
Compensation for employees who are retired is paid at 100% of their entitlements. This is to avoid any significant loss to pensioners, ensuring there is little disruption to their income. The only cap applied to this is the rate of any increased will be directly linked to inflation rates, but will not increase by more than 2.5% annually.
If you have taken early retirement
Those who have taken early retirement will only be entitled to a reduced payment. The pension protection fund will only pay up to 90% of the previous annual value and will be capped at payments of £34,655.05 per annum. There are also further caps for long service, but very early retirement and the pension protection fund have set out a table detailing these caps. It should be noted the table gives the figures before reduction to 90% of the value.
If you are still working
If you are still working, you will receive the compensation when you reach retirement age and the amounts described above. You can opt to receive the compensation at a later date which will increase the compensation accordingly from this date.
What should I do about a Pension Deficit?
If your business is facing financial difficulties and there is currently a pension deficit, particularly regarding a defined benefit scheme, you should quickly seek professional advice. Through early engagement, our Business Rescue Experts can provide advice on working with the Pension Protection Fund to restructure your business to attempt a rescue plan. Alternatively, if the matter has progressed too far, we can discuss options including liquidation and administration to conclude the affairs of the existing company.