The PPF (Pension Protection Fund) compensation cap, which previously limited the amount of annual compensation eligible members could receive, no longer applies. Following a landmark court ruling in July 2021, the statutory limit on the amount of compensation, commonly known as the compensation cap, was removed.
Understanding the Pension Protection Fund (PPF)
The Pension Protection Fund is a statutory fund in the United Kingdom established under the Pensions Act 2004. Its primary purpose is to protect members of eligible defined benefit (DB) pension schemes when their sponsoring employer becomes insolvent and the pension scheme cannot afford to pay its promised benefits.
- Role: The PPF steps in to ensure that members still receive a significant portion of their expected pension, providing a vital safety net for millions across the UK.
- Eligibility: Schemes must meet certain criteria to be eligible for PPF protection, and members typically receive either 90% or 100% of their expected pension, depending on their age and retirement status when the employer became insolvent.
The Removal of the Compensation Cap
Prior to July 2021, the PPF operated with a compensation cap, meaning that even if 90% of a member's pension was higher than a specific annual limit, their compensation would be capped at that maximum amount. This cap was designed to limit the PPF's exposure and ensure fairness across a broad base of members.
However, a significant legal challenge led to a ruling in July 2021 that found the application of the cap to be discriminatory. As a direct result of this court ruling, the PPF confirmed that:
- The statutory compensation cap no longer applies.
- Members who were previously capped are now eligible to receive full compensation, calculated at either 90% or 100% of their accrued pension, without any upper limit.
- The PPF has been undertaking a review to identify and recompense those members whose compensation was previously reduced by the cap, including paying arrears where applicable.
Implications for PPF Members
The removal of the PPF compensation cap represents a significant positive change for thousands of individuals, particularly those with higher pension entitlements.
- Increased Compensation: Members who were previously affected by the cap will see an increase in their annual compensation payments, receiving closer to their full pre-insolvency pension.
- Fairer Treatment: The change ensures that compensation calculations are more equitable and do not discriminate based on the size of an individual's original pension.
- Review and Arrears: The PPF has committed to reviewing all affected cases and making backdated payments (arrears) to those who were underpaid due to the cap. This process has been complex and ongoing.
If you are a member of a scheme transferred to the PPF and believe you were affected by the cap, it is advisable to keep informed through the official PPF channels or directly contact them for updates regarding your specific situation.
