The Pension Protection Fund (PPF) is a government entity responsible for compensating members for the defined benefit pension schemes whose employer can no longer meet their obligations or are out of business for some reason. The pension protection fund was established in 2005, and since then, it has helped many people to protect their defined benefit pension schemes.
How does the PPF (Pension Protection Fund) work?
When a company becomes insolvent, it stops making pension scheme contributions. In this case, the company’s former employees or staff that’s about to retire are deprived of what they have been promised. In such cases, the Pension Protection Fund steps up and pays the employees ‘pensions, provided the PPF criteria are met.
If the pension scheme is eligible for help, the PPF can cover as much as 90% of the benefits for any member below the retirement age. Those who are over the retirement age, members who receive survivors’ pensions, and those entitled to an ill-health early pension are eligible for 100% compensation.
However, there is a maximum threshold on how much the PPF can cover. For most people, that threshold is slightly more than £30,000. The size of this cap or threshold can vary with age and is adjusted each year according to that year’s inflation.
In the last two years, the PPF added more than 249,000 users on its books and managed a surplus of 1,200 pension schemes.
Why does the Pension Protection Fund only protect defined benefit pensions?
The defined contribution pension schemes are much like tax-privileged savings accounts. On the other side, defined benefit pensions are more of a promise made by your employer that they would provide you with a certain amount upon your retirement. If the workplace goes out of business or gets into some financial problems, they may not be able to honour their promise. That’s when the PPF steps in to protect the employees.
Nowadays, almost all modern pension plans are considered defined contribution plans. The Public sector pensions are an exception to that. Back in the days, almost all large employers had their employees included in defined benefit pension plans.
