Compensation paid by the PPF is subject to a cap (currently £31,380 per annum) for scheme members who are below normal pension age at the date their scheme enters the PPF.
The cap was introduced in order to protect the PPF against senior executives awarding themselves large pensions and then triggering insolvency: the cap would operate to remove the benefit in them doing this. However, it also:
- affects ordinary long-serving members who have built up a higher pension through a long career with the company and
- creates a “cliff edge” at normal pension age, in that a member who reaches pension age on the date of insolvency receives his full pension while another member, who is identical apart from being one day younger, has his benefit capped.
The Government has, therefore, announced a change to the way that the cap operates. For members who have service of at least 21 years, the cap will be increased by 3% for each year of service in excess of 20 (up to a maximum of twice the standard cap), so that the effect on such long-serving employees is reduced.
No timetable for the change has been announced; the Pensions Minister announced his intention to bring forward legislation as soon as the legislative programme allows. The increase in the cap will not be backdated for individuals who have already entered the PPF.
Comment
While the increase in the cap addresses the seeming injustice suffered by long-serving employees, it does still represent an increase in the benefits that will be paid by the PPF. That will, therefore, lead to an increase in the levy to pay for it. It might have been more equitable, between the compensated and those who pay the levy, if the starting level of the cap had been reduced and then the proposed long-service adjustment applied.