For a number of years now the Pension Protection Fund has paid my pension since my former employer folded.
From the date they took over my pension payment has been frozen at the level when they took over.
With the increase in the cost of living this is now beginning to make quite a difference in what we can afford. This will get worse as time goes on.
I assume this the situation for all their pensioners. Is there a case for a change in PPF rules?
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Retirement finances: My pension was rescued when an old employer went bust, but why don’t my payments ever rise with inflation?
Steve Webb replies: Before the Pension Protection Fund was created in 2005, a worker whose employer (or former employer) went bust could lose a large part of their pension.
The PPF now provides a good deal of protection but does not exactly match the pension you would have got if your employer had stayed in business.
The starting point for PPF protection depends on whether you are above or below normal pension age when the scheme enters the PPF.
For those above pension age, the compensation is based on 100 per cent of your pension and for those under pension age, the starting point is 90 per cent.
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For those under pension age there is also a cap on the total amount of compensation.
The cap on annual compensation is £41,161, but because it applies to those under pension age, only 90 per cent of this figure is payable.
This means the effective maximum compensation is £37,315 for someone retiring at 65. However, the cap has been subject to legal challenge and it is possible that this could change.
Once your basic level of compensation has been worked out, the other big difference from the benefits you would have got from the scheme is the way in which annual increases for inflation are worked out.
By law, company pension schemes only have to pay increases for inflation on the part of the pension you built up during years of work from 1997 onwards.
For this reason, the PPF will only pay inflation on ‘post 1997 service’, even if your scheme had more generous rules.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
This means that if all of your membership of the scheme was before 1997 you would get no inflation increases, and I imagine that is what has happened in your case.
The other main difference is that the measure of inflation used by the PPF is the Consumer Prices Index whereas many schemes use the Retail Prices Index.
In general, the RPI is higher than the CPI, so the annual inflation increases you get on your compensation from the Pension Protection Fund will tend to be less than you would have got if your pension scheme had continued to operate.
You are right that inflation increases matter and over time the rising cost of living can eat into your pension if it is not increased.
It could be argued that PPF compensation should be more generous, covering pre 1997 service and matching the inflation increases offered by your former scheme.
However, a good chunk of the funding for the PPF comes from a levy on those businesses which are still supporting company pension schemes.
That levy already costs these remaining businesses over half a billion pounds a year, and more generous PPF compensation could add significantly to that bill, especially if more companies go bust as a result of the current crisis.
Ultimately it is a political decision as to whether PPF compensation is generous enough and whether the right balance has been struck between members who are covered by the PPF and the companies who help to fund it.
If you feel that balance is wrong, it is clearly something you could take up with your local MP.
However, at the moment I suspect the Government will be reluctant to make changes which put extra costs on business at a time when the economy is so weak, even though this means you are facing an annual squeeze on your standard of living.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.