Pensions alert as Government warns this group will get ‘less than they were expecting’ | Personal Finance | Finance

The Government has clarified how pension rules work as many pensioners face a reduction in how much they are paid through their scheme.

MP Claire Hanna, from the Social Democratic and Labour Party, asked in Parliament if the Government has any plans to “review the (a) indexation, (b) 90 per cent compensation cap and (c) potential merits of other changes to the Pension Protection Fund”.

The Pension Protection Fund (PPF) takes on the administration of defined benefit schemes where a company has become insolvent.

The 90 per cent figure refers to the fact that if an employee has not reached state pension age when their company becomes insolvent, their payments will be reduced to 90 per cent.

Ms Hanna also asked if there are any plans to run a consultation on any changes to the PPF.

Pensions minister Emma Reynolds said in response: “I have heard about the problems experienced by defined benefit pension scheme members adjusting to an income in retirement which may be less than they were expecting following the insolvency of their employer.

“I recognise the importance of these issues for members and will consider this further in the coming months.”

Spelling out the rules, Ms Reynolds said: “Pension Protection Fund compensation payments based on benefits accrued on or after April 6, 1997 are increased in line with the Consumer Price Index, capped at 2.5 per cent.

“Before April 6, 1997, there was no general statutory requirement for defined benefit pensions to be increased when in payment, apart from any Guaranteed Minimum Pension element earned on or after April 6, 1988.”

She also rebutted the idea there is a “cap” on the compensation that that PPF provides. She explained: “Compensation is calculated at the date of employer insolvency and, at that date, is initially either 100 per cent of their accrued pension benefits for members over their scheme’s normal pension age or 90 per cent of their accrued pension benefits for members below their scheme’s normal pension age.”

The PPF now manages pension funds of folder big name companies including Woolworths and BHS, and it is currently assessing taking on Wilko’s scheme, after the chain collapsed last year.

One question about the future of the PPF is what will happen with its proposal to become a Public Sector Consolidator, taking on defined benefit (DB) schemes to boost their investment in ‘productive finance’ assets.

The fund said this new consolidator function could unlock £10billion for UK productive investments.

Kate Jones, chair of the PPF, said previously: “Evidence, and stakeholder feedback, suggests more choice in the market is needed to capitalise on this window of opportunity with improved funding levels.

“Our maturity and capabilities mean we can operate this new, separate fund – providing more choice for schemes and a secure home for transferring members – without affecting the continued successful delivery of our existing functions.”