Partner Rosalind Connor considers the background to the consultation on the draft Pension Protection Fund (Compensation) (Amendment) Regulations 2017 and the potential implications of some of the proposals.

Original news

DWP consult on draft regulations to allow the PPF to take account of bridging pensions, LNB News 31/08/2017 52
The Department for Work and Pensions is consulting on the draft Pension Protection Fund (Compensation) (Amendment) Regulations 2017, which would allow the Pension Protection Fund (PPF) to take account of bridging pensions by smoothing the amount of PPF compensation over the individual’s lifetime. The consultation closes on 1 October 2017.

What is the background to the Department for Work and Pension’s consultation on the draft Pension Protection Fund (Compensation) (Amendment) Regulations 2017?

A large number of defined benefit pension schemes have ‘bridging pensions’, which is a mechanism by which a pension for a member retiring‚ usually from active service‚ is higher in the years from normal retirement age until the state pension is paid for that member. The idea is that once the state pension is paid, the individual’s income goes up so the scheme pension can go down.
The benefits that are paid under the PPF to members of schemes where the employer is insolvent and the scheme is not well funded are based on a formula‚ calculated in part by using the pension that each member would have received if the scheme had not gone into the PPF. This means that the PPF level of a pension for a member of a scheme which provides bridging pensions depends on when the scheme goes into a PPF assessment. If the member is in receipt of the bridging pension when the scheme goes into assessment for the PPF (ie the member is in retirement before the state pension age), he would get a much higher pension than if the scheme went into assessment when he was no longer in receipt of the bridging pension (ie the member is in retirement but it is now after his state pension age). The government feels this is unfair‚the PPF benefit is supposed to be based on the member’s likely pension. There is‚ arguably‚ a windfall for this group of scheme members if the pension is based on the uplifted bridging pension which they would not expect to receive in the long term.

What are the key proposals for the change and why are they being implemented now?
The proposal is that the pension is ‘smoothed’ for those with a bridging pension. The PPF benefit will be based on the average level of pension, excluding increases, that the member is likely to get over time‚ rather than simply the pension in payment at the date of the assessment. This is then used as the base pension for the member in the PPF and the receiving PPF increases in the same manner as other recipients of PPF compensation.

The government is also looking at PPF benefits being paid as the scheme benefits would‚ with the higher pension rising up to state pension age and then dropping thereafter. However, this is not consistent with government policy, which is that PPF benefits are not scheme benefits. They are calculated initially with the benefits under the scheme in mind, but thereafter operate within PPF rules on payments, increases and its own environment. Connecting this pension to the future changes under the scheme is not consistent with this policy and‚ the government argues‚ it is much more complex to administer.

The consultation also notes another issue that gives rise to schemes giving members different benefits at retirement and at a later date. This relates to Guaranteed Minimum Pension (GMP) requirements. This may result in a member retiring at one date‚ with the pension increasing at a later date to meet GMP minimum requirements. A similar issue arises here but the consultation leaves this to be dealt with after the bridging pension issue is dealt with. A more cynical critique might note that this would involve increasing PPF compensation‚ whereas the bridging pension issue involves reducing PPF compensation‚ so perhaps the former is less attractive for the government to change.

How would the introduction of the proposals impact the pension scheme members, trustees and scheme administrators?

While a scheme is not in assessment for the PPF‚ this will not be relevant at all. However, if a scheme goes into assessment (ie if the scheme’s employer becomes insolvent), the benefits available will be different. For members, it will be different. They will not get the higher benefit at first and will not experience a drop in benefits at the state pension age. Benefits would be lower for many members who enjoy or prospectively are able to enjoy a bridging pension at the date the scheme enters assessment and of course any dependants who may receive future benefits because the calculation will be on a smoothed basis.

From a trustee or administrator’s point of view, this is going to require more work during a PPF assessment, but until and unless the scheme enters a PPF assessment, there will be no change.

What is the timetable for the implementation of the changes? What are the government’s next steps?

The draft regulations are out for consultation with the consultation closing on 1 October 2017. A timetable is not in place but the indication is that regulations would then be brought in over the following few months. However, it should be noted that the regulations are not intended to be retrospective‚ they would only affect members of schemes that enter a PPF assessment after the date the regulations come into force.

This article was first published on Lexis PSL Pensions on 8 September 2017. Click for a free trial of Lexis PSL.