PPF entry: a smooth landing

Introduction

The PPF provides compensation for pension scheme members if their employer goes out of business and the pension scheme cannot provide benefits in excess of PPF compensation levels. But it is not always easy to foresee PPF entry or to achieve a smooth landing into the PPF as there are complex legal rules.

In this news we look at the eligibility conditions and some of the practicalities associated with entering a PPF assessment period.

In this Alert:

• Key points
• Checking in
• No reservations
• Doors to manual
• Encountering turbulence
• Co-Pilots

Key points

• Certain conditions have to be met for a pension scheme to enter the PPF and for the members to receive compensation.
• Trustees should be aware of PPF entry requirements and check whether their scheme is eligible, including identifying statutory employers.
• On entering a PPF assessment period trustees remain responsible for the scheme until it is admitted to the PPF.
• The PPF assessment period can be a challenging time for trustees and they may require additional help.

Checking in

Broadly, to be eligible for the PPF the scheme must be an occupational pension scheme providing DB benefits. The PPF does not pay compensation for pure DC benefits, which are secured outside of the PPF.1

The key requirement is that an employer will need to undergo a qualifying insolvency event. Trustees will need to keep a close watch on an employer’s covenant because insolvency situations can unfold quickly, but even a short waiting period can allow valuable time to prepare.

There are also a number of other requirements. These are set out in the Pensions Act 2004 and confer no discretion on the PPF. For instance, the PPF will not provide compensation if there has been a compromise of any section 75 debt due to the scheme.

The fact that a scheme pays the PPF levy does not mean it is an eligible scheme or will automatically enter the PPF.

Trustees can take steps to investigate PPF eligibility as part of assessing and managing scheme risks, and these include taking legal advice on eligibility.

No reservations

A recent example illustrates the pitfalls of PPF entry. It has been reported that the George and Harding pension scheme was refused entry to the PPF because the scheme’s sponsoring employer was not regarded as a ‘statutory’ employer for the purposes of PPF admission.2

Following this, in July 2011, TPR issued a statement: Identifying your Statutory Employer, reminding trustees that they should “identify and assess the legal obligations of each of the scheme’s employers”. This will assist trustees in the PPF context because it is the statutory employers that will need to undergo insolvency events in order for the Scheme to be eligible for the PPF.3

Doors to manual

Trustees will remain responsible for their scheme until it is admitted to the PPF, but they will need to meet the PPF’s requirements for schemes in assessment, including taking the following actions:

• Pensions in payment to members who are below their NPA at the assessment date must be cut back to PPF compensation levels.
• Trustees must recover any overpayments made before benefits are cut back. Practical difficulties can arise when doing this and it should be one of the first things trustees address.
• Death in service payments cease.
• No further member or employer contributions can be paid during an assessment period, unless the payments are due in respect of periods prior to the assessment date.
• No DB transfers can be paid out.
• Trustees should consider their investment strategy, and whether to seek the PPF’s views on this.

Early communication with members is essential in order to explain what is going on and reassure members about the safety of their benefits.

Encountering turbulence

The assessment period is rigorous, as the PPF examines the benefits payable under the scheme and any recent changes. The process can result in complex technical issues being raised, such as whether benefits have been equalised properly.

In addition, data and benefits will need to be checked, which can be time consuming if records are incomplete.

Co-Pilots

The PPF assessment process is likely to present a major strain on resources and take up a considerable amount of trustee time. Events can unfold quickly and there may be little time to prepare from the point when an employer insolvency event can be predicted with certainty. To add to the pressure on trustees, they may encounter the loss of executive support provided by the employer.

It may therefore be necessary to appoint a professional project manager or an independent trustee to help take the strain. We have extensive expertise of project managing schemes and generally providing support to trustees during the PPF assessment period. Sackers can also advise on eligibility and other technical issues that can arise during a PPF assessment period. Please speak to your usual contact.

1 Following the recent case of Bridge Trustees, the DWP have announced that they will review definitions for some hybrid benefits which may have complications for PPF eligibility – see ourAlert dated 28 July 2011.

2 The Government is currently consulting on extending FAS to schemes in this position.
3 See “Who’s Who? Identifying your statutory employer” dated 25 August 2011.