The Pension Protection Fund (PPF)

By This Is Money
Updated: 05:11 EST, 8 April 2014

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We explain what the Pension Protection Fund (PPF) is, to help those whose final salary schemes have collapsed - and how it works.

Safety first: How is your pension protected?

Managed by an independent board, the Pension Protection Fund (PPF) was established in April 2005.

Its purpose is to pay compensation to members of eligible defined benefit final salary pension schemes, whose employers have gone belly-up and do not have sufficient assets to payout to its members.

Eligible firms who have a final salary pension scheme , which is a reported 7,800 throughout the UK - have to be a member of the PPF and pay it a compulsory levy.

When a firm knocks on the door of the PPF with problems, the group goes into an assessment period, where the PPF looks to establish if a scheme is eligible for PPF compensation.

In certain circumstances, it can direct trustees in areas such as investment of scheme assets, incurring expenditure and bringing or the conduct of legal proceedings.

In addition, it will also make sure that the scheme recovers what it can from the insolvent employer.

The scheme will withdraw from the PPF assessment process if it is rescued - a new employer takes on responsibility for the scheme, or the scheme has enough assets to buy benefits with an insurance company which are at PPF levels of compensation or above.

But if it takes on responsibility for a scheme, it will pay compensation to scheme members.

How much could scheme members get?

Members who have reached their scheme's normal pension age, will generally receive 100 per cent compensation for what they should have received at the time their employer went bust.

Typically, the PPF, will also pay 100 per cent compensation to those who have retired on legitimate ill-health grounds, regardless of age, and those receiving a pension in relation to someone who has died at the time that the employer went bust.

Members who have not yet retired will receive up to 90 per cent compensation on reaching retirement age.

But these 90 per cent compensation levels are also subject to a cap which is recalculated every year for new pensioners this cap.

The cap at age 65 is, from 1 April 2014, £36,401.19 (this equates to £32,761.07 when the 90 per cent level is applied) per year. The earlier you retired, the lower the annual cap is set, to compensate for the longer time you will be receiving payments.

You can view a full list of the compensation caps for each age here.