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Welfare Reform and Pensions Act 1999

Section 17: Compensating occupational pension schemes

This section modifies the compensation provisions in the Pensions Act 1995, with the aim of ensuring that more members of occupational pension schemes receive a greater proportion of their benefits than under the current compensation provisions, should funds be lost because of theft or fraud.

The compensation provisions were introduced in the Pensions Act 1995 and are administered by the Pensions Compensation Board (PCB). The PCB pays compensation to an occupational pension scheme if it has suffered a reduction in its assets through dishonest action, the remaining assets are below a set level and the sponsoring employer is insolvent. The level to which a scheme’s assets must fall before a claim can be made and the amount of compensation that the PCB can pay are set out in the Pensions Act 1995 and the Occupational Pension Schemes (Pensions Compensation Provisions) Regulations 1997.

Currently, the value of a scheme’s assets must fall below 90% of the amount of its total liabilities before a claim may be made. The maximum amount of compensation payable is that needed to restore the scheme to the 90% threshold, or 90% of the loss—whichever is less. (In salary-related schemes the funding level is measured using the valuation method for the Minimum Funding Requirement (MFR), which sets a benchmark funding level that schemes are required by law to attain.)

Subsections (1) and (2) reduce this limitation on occupational pension schemes applying for compensation, by amending the rule in the 1995 Act.

Instead of having to fall below 90% of its total liabilities, a scheme will be eligible for compensation if its assets fall below a new “protection level”. This is the combined value of 100% of its most urgent liabilities and 90% of its other liabilities. The most urgent liabilities include those to its members already receiving a pension, and those to its members within 10 years of retirement (who will be defined in regulations). This latter group already has to be identified separately for the statutory MFR valuation. Taking a power to prescribe it allows flexibility for compensation calculations to be adjusted in line with any future changes to the MFR basis.

Subsections (3) to (6) correspondingly increase the maximum amount of compensation that may be paid, in line with the new threshold.

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