Yesterday, I covered the deficit that the Carillion schemes are facing. Today, a quick trot through the pension ‘lifeboat’ scheme and what it might mean to the 28,000 members of the 13 Carillion schemes.
What is the Pension Protection Fund?
The PPF was established largely in the wake of the Maxwell pension scandal of the 1990s to provide some form of compensation to members of schemes when the employers sponsoring those schemes go into financial difficulty or become insolvent. Before this, if the worst happened, members who may have contributed all their working lives to a pension could face penury in retirement as their pensions disappeared, despite the funds supposedly being held by the scheme trustees outside of the employer. The PPF now provides capped compensation to members and pensioners as long as the scheme qualifies for transfer into the PPF. Remember this does NOT apply to money purchase (defined contribution) arrangements.
After a period of assessment (which can last years and certainly at least 12 months) it is almost certain that the Carillion schemes will fall within the PPF remit.
A spokesperson for the PPF said:
"We want to reassure members of Carillion's defined benefit pension schemes that their benefits are protected by the PPF."
The level of compensation is likely to be about 90% of what the members might otherwise have expected on retirement, capped to a maximum of £38,505. Pensions already in payment are paid in full. However, regular annual increases are likely to be lost. The actual calculations for various categories of members are in fact quite complex – much like everything about pensions – and, depending on the quality of the data held by the schemes, can cause considerable delay. Even the calculation of the cap is not straightforward: for example, for long service members (over 20 years) an increase factor is applied!
For Carillion members the message at the moment is probably ‘Don’t Panic’ – there may well be a temptation to transfer into some other arrangement, but generally I would advise caution at this stage. The storm clouds really do need to settle before decisions are made which could severely and adversely affect your pension. Proper qualified financial advice should be sought.
Despite what the more populist press may say, recourse to the PPF should not be seen as a disaster. Rather it will provide a guaranteed level of income which, in this uncertain scenario, could remain an attractive option to members.