THE FINANCIAL ASSISTANCE SCHEME (FAS)
THE PENSION PROTECTION FUND (PPF)
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The UK Government has an obligation under EU law to protect workplace pensions and has, as a result, established two very similar schemes to bring this into effect for company schemes which provided a defined benefit pension (i.e. based on final salary):
Both schemes are administered by the PPF organisation (which can lead to confusion).
- The Financial Assistance Scheme (FAS) is for schemes which started to wind-up between 1 January 1997 and 5 April 2005, and did not have enough money to pay members' benefits. The remaining scheme assets of a failed scheme are transferred into the Treasury Current Account and then the Government pays and underwrites the FAS payments which comprise of the remaining pension and an FAS top-up.
- The Pension Protection Fund (PPF) is for schemes that started to wind up after 5 April 2005. The cost of this scheme is covered by a compulsory levy on all remaining final salary pension schemes. The PPF also takes the assets of failed schemes but they are then invested to help finance the payments. This means that the remaining pension and the top-up payments are theoretically at risk from investment failures, although the investment record to date has been very good.
The FAS was closed to notification of new schemes on 1 September 2016 (which does not affect members receiving, or with a deferred entitlement to receive, assistance payments from the FAS). If your scheme entered wind up before 5 April 2005, is eligible, but has not yet been accepted by the FAS, then it will enter the PPF
The Pensions Action Group is concerned primarily with members covered the FAS, but there are many instances where the interests of FAS and PPF members are the same.
- The FAS will top up your 'core pension' to 90% of the pension you built up in your scheme before it started to wind up.
- Your 'core' pension is the gross monthly amount that you were promised by your scheme. It ignores many of the features which you have paid for, including:
- Any indexation beyond the legal minimum
- Optional early retirement without penalty
- Surviving spouse pension beyond 50%
- Tax-free lump sum
- Guaranteed Minimum Pension (no special treatment of indexation)
- If you left the scheme before wind-up, your pension will increase in accordance with scheme rules up to the date of wind-up.
- From the wind-up date to the date you reach your scheme's normal retirement age (NRA), any part of your accrued pension which is entitled to increases in accordance with the scheme rules, will increase from wind-up date to 30 March 2011 in accordance with Retail Prices Index (RPI) (up to a maximum of 5 per cent per year). From 31 March 2011 to your normal retirement date, increases will be in accordance with Consumer Prices Index (CPI) increases (up to a maximum of 5 per cent per year).
- FAS payments to members are paid for life.
- If your FAS payments plus the payments from your residual pension exceed a level which is set each year then they will be capped at that level (£34,229 for financial year 2017/18).
- If you have long service with your scheme, the cap will be increased by 3% for each complete year of service over 20 years, up to a maximum of 20 additional years (i.e. 40 years in total).
- Payments commence at your scheme's Normal Retirement Age, or age 65, whichever is later.
- No allowance is made for any early retirement options written into your scheme rules.
- At Normal Retirement Age, your FAS payments are calculated on the basis of your original pension entitlement, less any amount received from your remaining pension. (This will be estimated if you transferred out rather than taking an annuity). The current year's cap is applied if appropriate to set the actual payment.
- Your FAS payments will be increased each year by the lesser of CPI or 2.5%, but only in respect of service years after 1 January 1997; there is currently no indexation for prior years. If your payments are capped, the new cap level is not reapplied.
- On your death, your spouse or partner will continue to receive 50% of the payments you were receiving, provided that they qualify.
- The payments are underwritten by Government which means that there is no risk from adverse financial market conditions.
Full details of the detailed provisions are available from the FAS website in an explanatory booklet (external links).
The main differences between the PPF and the FAS are:
- PPF is funded by a levy on remaining schemes and its investment income. There is therefore no financial guarantee from Government and there is specific provision for payments to be reduced if funds prove to be insufficient. This could happen if several major schemes which are badly underfunded are taken into the PPF, or if there is a market crash Government is obviously keen that this should not happen, which is why they are taking such a keen interest in schemes such as Carillion and Tata Steel. That said, the financial position of the PPF at present is considered to be good.
- Because schemes in the PPF all started wind up later than FAS schemes, PPF members will on average have more years of post-1997 service and hence better indexation than FAS members.
Although the FAS is a considerable improvement on the previous situation when people were faced in some cases with the complete loss of their sole pension, it falls a long way short of what members paid for and it appears at first sight to be better than it actually is. Here are the main problems:
- 90% maximum payment. Pensions are just deferred wages and are a long-term savings vehicle. When the banks ran into trouble in 2008, savers were compensated in full for their losses by the Government. Why should pension savers be treated any differently?
- Limited indexation. The indexation provided by the FAS has been set at the legal minimum for pension schemes operating between 1997 and 2005. So if your scheme was offering the legal minimum, you really will get 90% of your original pension. However, we only know of one scheme (Dexion) which did this; all the rest provided better indexation but a lower overall pension (because indexation is expensive). The FAS ignores this additional indexation, so that part of your savings package is ignored. This has already resulted in some FAS members getting as little as 60% of their expected pension, compared to the payments they would have received under their own scheme rules.
- The Cap. The original justification for the cap was to prevent 'moral hazard' whereby directors and managers might take reckless decisions knowing that their pension liabilities would be taken care of by the Government. There was no indication that this ever happened. In fact, most directors and senior personnel are careful to ensure that their pensions are kept entirely separate from those of the workforce. Those members caught by the cap are actually the good guys, who threw in their lot with their workers to try to get the best pensions for all. The main effect of the cap then, apart from damaging the pensions of these people, is actually to encourage the use of 'directors pensions' which could be said to increase the moral hazard risk.
- No backdating of payments prior to 2005. Those deferred pensioners who reached NRA after their schemes commenced wind up but before 5 April 2005 did not receive back-payments for that time. This is an injustice. Why should those who reached NRA later get a better settlement than those who retired earlier?
- Tax free lump sum. The tax-free lump sum (TFLS) is an important part of most people's retirement plans, and the tax saved is a significant benefit. The FAS only permits those whose schemes had significant residual assets to take a TFLS, and then only up to 25% of the value of their share of the assets (not the value of their original pension). It is clearly arbitrary and unfair that members should only receive this benefit in proportion to the funding level of their original scheme. It means that those who have lost the most get the lowest benefit. Furthermore, the tax concession is available to every single pension saver in the country, no matter how wealthy. How can it be fair that a worker who has lost all of his pension (through no fault of his own) is the only person who has to pay the full amount of tax on the FAS pension money that he or she does receive?
- Pre-retirement revaluation. The FAS uses a standard calculation to revalue pension entitlements from the date of starting wind-up to NRA. Where this differs from scheme rules, there will be some people who gain and others who lose. In order to eliminate this arbitrary variation, scheme rules should always be used.
- Split Retirement ages. There are some schemes where members have accrued benefits which would have been accessible at different ages, but the FAS benefits are paid from the overall scheme retirement age even if a member had the majority of benefits due for payment at an earlier age. If a member has certain benefits which were payable at a certain age then he should receive them then.
- Earlier entitlement date. Some schemes made provision for members to retire before the NRA without any actuarial reduction. This was a significant benefit which was built into the original scheme and would have been funded by the member's contributions, yet it is ignored by the FAS. Those affected could otherwise have had a larger headline pension. It is unfair that they should lose that part of their retirement savings whereas those without this facility are unaffected, particularly since the PPF does recognise these early retirement provisions.
- Voluntary early retirement. Most schemes allow people to take their pensions early with an actuarial reduction and this is a very important feature for some people, particularly as it is now so hard for older people to find work. The FAS does not allow for this because of the cash flow implications even though there would be no overall increase in costs.
- Other benefits. Your scheme may have had other benefits, such as improved provision for your spouse after your death, but none of these are taken into account by the FAS in calculating your core pension. All of these extras cost money and were taken out of your contributions, giving a lower core pension. So, the better your scheme was in providing for its members, the worse the settlement you will get.
The information on this page is given in good faith but may contain errors or omissions. Visitors should check with the FAS or PPF websites to confirm accuracy before making any decisions or taking any action based on this information. Pensions Action Group cannot accept liability for any losses resulting from use of this page.