I am sure that the Carillion story will run for some time to come. Was the company mismanaged? Did the executives rip it off? Should the Government have done something different?
The purpose of this article is to highlight the position that members of the Carillion Pension Scheme might soon find themselves in. What I describe below applies also to any pension scheme that loses the support of the employer.
The Pension Protection Fund (PPF) was established to pay compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to provide a specified level of compensation. In other words, where the likes of Carillion and BHS go bust, with a hole in the pension fund accounts, then the PPF steps in to safeguard pensioner rights.
Once a pension scheme has been admitted to the PPF, there are various levels of benefit that may be provided for the members:
If You Have Retired
You will have been receiving a pension from your scheme before your former employer went bust. If you were beyond the scheme’s normal retirement age when your employer went bust, the Pension Protection Fund will generally pay 100 per cent level of compensation, which means it will generally pay you the same level of pension income when your scheme enters the PPF.
Your pension payments relating to pensionable service from 5 April 1997 will then rise in line with inflation each year, subject to a maximum of 2.5 per cent a year. Payments relating to service before that date will not increase.
This information may also apply if you retired through ill-health or if you are receiving a pension in relation to someone who has died.
If You Retired Early
If you retired early and had not reached your scheme’s normal pension age when your employer went bust, then you will generally receive 90 per cent level of compensation based on what your pension was worth at the time. The annual compensation you will receive is capped at a certain level.
The cap at age 65 is, from 1 April 2017, £38,505.61 (this equates to £34,655.05 when the 90 per cent level is applied) per year. This is set by the Department for Work and Pensions.
From 6 April 2017, the Long Service Cap came into effect to support members who have 21 or more years’ service with their employer. For these members the cap is increased by three per cent for each full year of pensionable service above 20 years, up to a maximum of double the standard cap. The earlier you retired, the lower the annual cap is set, to compensate for the longer time you will be receiving payments.
If You Have Yet to Retire
Under the PPF, when you reach your scheme’s normal retirement age, it will pay you pension income based on the 90 per cent level subject to a cap, as described above. The bottom line is, if you are in the unfortunate position of working for a Carillion, or a BHS, then there is some protection for your pension, but it may be limited.
Defined benefit pension schemes have always been viewed as the zenith of pension planning. However, particularly for higher earners, this may not necessarily be the case. The strength of the employer, and its willingness to fund pension benefits, are vital ingredients in a successful pension scheme. Unfortunately, Defined Benefit schemes can be very expensive and may bring a financial challenge to some weaker employers.
With defined contribution/money purchase pension schemes, what you see is what you get, and your pension pot is “earmarked” to provide pension benefits for you. Whether that pot will provide sufficient income to live on, is another question.
Peter Rutherford is a Director at Rutherford Hughes Ltd. He can be contacted on 0191 229 9600 peter.rutherford@rutherfordhughes.com
