Cymraeg MembersPublicationsUseful LinksGlossary

FAQs for Industry Professionals

These questions and answers are more technical, and are aimed at actuaries, trustees, the legal profession, adminstrators concerned with the provision of benefits etc.

What is a scheme's normal pension age (for compensation and section 143 valuation and, from 6 April 2007, section 179 valuation purposes)? (updated 6/4/2007)
Normal pension age is the normal retirement date under the scheme rules, or such earlier age specified in the rules where the only condition for the member to retire without actuarial reduction is the attainment of a particular age or length of service. Where scheme rules permit members to retire before their normal retirement date without actuarial reduction, but any other condition or contingency (for example redundancy) applies, that rule does not usually operate to reduce the normal pension age of the member.

It is possible to have separate tranches of benefits which have different normal pension ages, such as benefits payable for a period of service when that benefit accrued with a different normal pension age. An illustration of how tranches of benefits are calculated is available here. In reaching this conclusion, the Pension Protection Fund has sought the advice of Andrew Simmonds Q.C.

I am a trustee of a small pension scheme and do not have the facilities or resources to pay pensions let alone take actions to split payments between members and the Pension Protection Fund. Would the Pension Protection Fund be able to take on payments during the assessment period?
The Pension Protection Fund can not take on responsibility for the payment of benefits and management of assets until the formal transfer of assets and responsibility at the end of the assessment period.

If a scheme enters an assessment period and the trustees do not have the resources and facilities to carry out their tasks, the Independent Trustee appointed by the Pensions Regulator will ensure that the necessary action is taken.  The Pension Protection Fund will provide a designated case worker to help guide the trustees through the assessment period.

We would expect the relevant administrator or payroll provider for the scheme to manage the payment of benefits under the control of/delegated power from the trustees. The Independent Trustee would be responsible for ensuring such services are available and that the benefit payments comply with the legislation.

Please could you confirm how the factors for adjusting the compensation cap (where compensation commences at ages other than 65) apply where the commencement age is not an integer?
The compensation cap factor applying at an age which is not an integer is that which applies at the age last birthday.

What is the Pension Protection Fund’s position on GMP equalisation? (updated 2/10/2008)
A large number of responses were received in respect of the consultation on the Benefit Equalisation for GMP. The Board of the Pension Protection Fund is currently reviewing these responses, and it is clear that there is a lot to consider and discuss with stakeholders before the Board reaches a definite decision. It is now aiming to publish its proposal for GMP equalisation early in 2009.

How do you calculate the level of compensation where a member has commuted part of his pension for a lump sum? (updated 3/4/07)
The following example demonstrates how the Pension Protection Fund would calculate the level of compensation applicable where part of a person's pension has been commuted to a lump sum. It is intended as a guide to the methodology and figures are illustrative rather than directly applicable.

The Board publishes tables of compensation cap factors. The cap at age 65 is governed by legislation and the factors applying at different ages are actuarial adjustments to this cap factor. These factors are prior to any application of 90% level of compensation. They can be found in the Guidance section of the website

  • Member is an early retiree
  • Member is aged 58 (cap at age 58, taken from the appropriate table of compensation cap factors is £24,487.69)
  • Pension Protection Fund compensation for an early retiree under normal pension age, immediately before the assessment date is 90% level of compensation and the compensation cap would apply
  • Member's annual value of pension, had there been no commutation, would have been £26,500. This is in excess of the compensation cap of £24,287.69, so the cap applies.
  • The member's annual rate of pension, after commutation, is £19,500

Calculation where annual value of pension exceeds compensation cap

1.Calculate cap fraction: £24,487.69 (cap) divided by £26,500 (annual value of pension, pre commutation) = 0.9240638

2.Calculate cap for annual rate of pension: 0.9240638 (cap fraction) x £19,500 (annual rate of pension post commutation) = £18,019.24

3.The amount would then be reduced to provide 90% level of compensation = £16,217.32

Where the trustees do not have the original retirement quotation for the member, the trustees may still be able to calculate the annual value of the benefit by working backwards using the data they have, such as the pension amount after commutation, scheme commutation factors, and amount of the lump sum.

Where a member makes an application for early payment of compensation from the Pension Protection Fund after it has assumed responsibility for a scheme,  is the early retirement factor applied before or after the compensation cap?
The early retirement factor is applied to the compensation before the compensation cap is applied.

If the Pension Protection Fund does not assume responsibility for a scheme for whatever reason, would its annual levy (or part of it) be refunded?
If a scheme is an eligible scheme at the start of the financial year, the trustees or managers will be liable to pay the Pension Protection Fund levies, even if the scheme is in an assessment period. 

If the Pension Protection Fund does not assume responsibility for the scheme at the end of the assessment period, the scheme may nonetheless remain an eligible scheme.   If the scheme ceases to be an eligible scheme, no further levies will be payable, but there will not be a refund for the current year's levy.

What are the PPF benefits for part of a Scheme that provides money purchase benefits with a defined benefit underpin?
In respect of money purchase benefits with a defined benefit underpin, the Pension Protection Fund will test, in respect of each member, whether the underpin has bitten.  So where a defined benefit underpin applies because the member’s benefit does not exceed the amount of the underpin, the member will be treated as having a defined benefit (and would be entitled to compensation in respect of that benefit) and where the member’s money purchase pot exceeds the value of the underpin, the member will have money purchase benefits which will be discharged outside the Pension Protection Fund.

Where the underpin has bitten, the member is entitled to the defined benefit.  The test of whether the underpin applies will be based on the full value of the underpin and not the PPF level of compensation in respect of the benefit.  So the test will be whether the scheme value of the underpinned benefit is exceeded by 100% of the money purchase pot.

How are benefits in respect of the Barber window calculated?
This question is answered here .

Which benefits are money purchase?
We have recently been considering the impact of the Court of Appeal's judgment in Aon v KPMG concerning the definition of a money purchase benefit.  It is our current view that following the Court of Appeal's judgment it appears that a fixed pension purchased with a transfer-in payment may not be regarded as a money purchase benefit because it would not be "calculated only by reference to" a payment or payments made by the member or by any other person in respect of the member.  However, in our view money purchase AVCs would appear to remain money purchase even after they come into payment and if they are paid out of the scheme.  This remains a matter of considerable uncertainty.

In comparing pension with the compensation cap in order to add a pension size rating to the mortality tables, which compensation cap should be used?
For the purposes of this comparison, use the compensation cap at age 65 at the effective date of the valuation. This is the case whatever the age of the member and whatever the normal pension age of the scheme when working out the pension size ratings for mortality tables

If a scheme only revalues for complete years in deferment how would this be treated by the Pension Protection Fund?
Revaluation for the period prior to the Assessment Date is in line with the scheme rules and then for the period from the Assessment Date under normal pension age in line with the Pension Protection Fund rules.  The manner in which a deferred member’s benefits will be revalued in set out in more detail in paragraphs 16 and 17 of Schedule 7 of the Pensions Act 2004.

If the rules of the scheme are such that only complete years are used then there could be occasions when for a period of time no revaluation is applied.

How do you calculate “pensions increases” when a scheme enters an assessment period? (added 4/1/2006)
Increases may only be paid in accordance with Pension Protection Fund rules. Paragraph 28 of Schedule 7 provides that there is only an entitlement to indexation on the indexation date (1 January).

During the assessment period the trustees are required to reduce benefits to the level of compensation which would be paid by the Pension Protection Fund under schedule 7, if it assumed responsibility for the scheme. Paragraph 28 provides that a person is only entitled to an increase on the indexation date where that person became entitled to the periodic compensation during the period of 12 months ending immediately before 1 January, 1/12th of the PPF level of indexation for each full month for which he was so entitled to compensation.

So for example if a scheme indexed on 1 June every year and the scheme entered an assessment period on 1 May 2005, indexation will be paid on 1 January as follows:

Members' are entitled to 1/12 of the indexation amount for each full month they are entitled to compensation i.e. from the assessment date to 31 December 2005.

So in the example scheme indexation would be paid on 1 January for the period from 1 May to 31 December = 8 months and it would be 8/12ths of the PPF level of indexation from 1 January 2006.  If the assessment date was fixed at 15 May, the member would only be entitled to 7/12ths, as he only became entitled to compensation 7 full months before 1 January.

Members will not receive any increase for the period prior to the 1 May because pension increases only apply to full months between the assessment date and indexation date.

Is the spouse’s compensation, where payable, half of the member’s pre-commutation or post-commutation compensation?
The spouse’s compensation, where it is payable, is half the member’s post commutation compensation.

Where the member dies before normal pension age and was not in receipt of compensation at date of death the question of whether the spouse’s compensation is 50% of the pre-commutation or the post-commutation compensation does not arise because no commutation has taken place.  In such a case the spouse’s compensation (where it is payable) is half the member’s compensation that he would have received if normal pension age had been the member’s actual age immediately before the date of the member’s death.

On commutation of a member's pension, do the pre and post 97 commutation factors apply in the same proportion as the member's pension relates to pre and post 97 service, or does a member have the facility to choose? (added 31/3/2006)
The pension attributable to pre and post 97 service should remain in the same proportion both pre and post commutation.

What information do I need to provide the PPF with in order for them to validate a compromise agreement? (added 20/12/2007)

Regulation 2(3) of the Pension Protection Fund (Entry Rules) Regulations 2005 requires the actuary to provide the PPF Board with an “estimate of the current value of the assets and the protected liabilities of the scheme together with a statement about the effect which the agreement would have on the value of the scheme’s assets as recorded in that statement”.  For these purposes, the Board requires the protected liabilities to be estimated using the section 143 valuation guidance and assumptions, as published on the PPF website.  You should note that a ‘current’ value is required; legislation does not define ‘current’ in these circumstances, but our preference would be for the value to be within 2 months of the date the information is submitted.

In addition, the following information should be submitted with the actuary’s estimate:

  • A summary of the methodology and assumptions used in estimating the assets and liabilities, and the effective date of the calculation
  • Copies of the asset statements used as a basis for estimating the asset value, and a description of how net current assets have been allowed for.  For example, if a calculation date of 31 January 2008 were to be used, then it may be that assets are estimated based on 31 December 2007 asset statements.  In such a case the PPF would require the 31 December asset statements
  • Confirmation of how the section 75 debt has been calculated, description of treatment of any money purchase or hybrid benefits, confirmation whether there are any insured annuity policies and how those assets and corresponding liabilities have been valued
  • A completed ‘Data and Liability Information spreadsheet’ available from the Valuation Guidance page of our website.

The Board may then need to request further information once the above has been received depending on the content of the information provided.  
© 2004 Pension Protection Fund Site Map Accessibility Terms of Use