Schedule 7: Pension compensation provisions
571.This Schedule explains how the compensation payable from the Pension Protection Fund is to be determined. The amount of compensation paid is calculated as a percentage of the benefits a person was entitled to or in receipt of from the scheme. For example 100% compensation will be given where a person was in receipt of a pension immediately before the assessment date. The amount payable is limited by the compensation cap where a person was under normal pension age at the assessment date. Pension compensation may also be paid to survivors of persons in receipt of compensation
Pensions in payment at assessment date
572.Paragraph 3 provides that where a person was in receipt of a pension prior to the assessment date, he will receive 100% of the protected pension rate he was entitled to from the scheme plus annual increases under paragraph 28. This will be subject the Secretary of State’s power to vary percentage rates (paragraph 30).
573.Where a person was in receipt of a pension from the scheme prior to the assessment date and had not attained normal pension age before that date, he will receive 90% compensation. This will not apply where he had received benefits as a result of ill-health subject to the power to review a person’s ill-health pension – see sections 140 to 142. This will be subject to the compensation cap (paragraph 26) and the Secretary of State’s power to vary percentages (paragraph 30).
574.Paragraph 4 deals with where the pensioner who is in receipt of pension compensation dies. The widow or widower will receive, after his death 50% of his compensation. Regulations will set out when the widow or widower will not be entitled to compensation. This will allow provision to be made for cases where the scheme rules did not pay a pension to a widow or widower.
Pension benefits postponed at assessment date
575.Paragraph 5 provides that 100% pension compensation will be paid where before the assessment date a person had been entitled to a pension, was over normal pension age and had postponed taking that pension. The compensation is calculated by reference to the protected pension rate he would have received plus any increases under paragraph 28. This is subject to the Secretary of State’s power to vary the percentage (paragraph 30). The member may commute (convert into a lump sum) part of the pension compensation when it comes into payment (see paragraph 24). The pension compensation is paid from the assessment date, subject to any provision made to postpone entitlement under section 164 during the assessment period.
576.Paragraph 6 provides that 50% of the pension compensation in payment will be paid to the member’s widow or widower when he dies. Regulations will set out when the widow or widower will not be entitled to compensation. This will allow provision to be made for cases where the scheme rules did not pay a pension to a widow or widower.
577.Paragraph 7 provides that lump sum compensation can be paid from the Pension Protection Fund. This will be paid where the member had postponed entitlement to a lump sum from the scheme and he had attained normal pension age. 100% of the lump sum payable from the scheme will be paid at the assessment date. This is subject to the Secretary of State’s power to vary percentages (paragraph 30) and does not include a lump sum received as a result of commutation.
Active members over normal pension age at assessment date
578.Paragraph 8 provides that pension compensation of 100% is payable to active members of the scheme who were over normal pension age before the assessment date. The compensation is calculated by reference to the protected notional pension accrued plus increases calculated under paragraph 28. This is subject to the Secretary of State’s power to vary the percentage (paragraph 30). The pension compensation is paid from the assessment date and part of it may be commuted for a lump sum (see paragraph 24).
579.Paragraph 9 provides that 50% of the pension compensation in payment will be paid to the member’s widow after he dies. Regulations will set out when the widow or widower will not be entitled to compensation. This will allow provision to be made for cases where the scheme rules did not pay a pension to a widow or widower.
580.Paragraph 10 provides for when lump sum compensation can be paid from the Pension Protection Fund. This will be paid where the active member had a right to a lump sum and was over normal pension age. 100% of the accrued amount in respect of the lump sum plus any increases under the scheme’s rules (referred to as the admissible rules) will be paid at the assessment date. This does not apply to a lump sum received through commutation.
Active member who have not attained normal pension age
581.Paragraph 11 provides that 90% pension compensation is paid to active members who had not attained normal pension age before the assessment date. The amount payable will be calculated by reference to the accrued protected notional pension plus increases under paragraph 28 plus the revaluation amount. This is subject to the compensation cap (paragraph 26) and the power of the Secretary of state to vary percentages (paragraph 30). The pension compensation will commence at his normal pension age and part can be commuted (see paragraph 24).
582.Paragraph 13 provides that 50% of the pension compensation in payment, or payable, will be paid to the member’s widow or widower after his death. Regulations will set out when the widow or widower will not be entitled to compensation. This will allow provision to be made for cases where the scheme rules did not pay a pension to a widow or widower.
583.Paragraph 14 provides for when lump sum compensation can be paid. Where the member has been entitled to a lump sum he will receive 90% of the accrued amount plus the revaluation amount. This will be paid when he attains normal pension age. This does not apply to a lump sum received through commutation. This is subject to the compensation cap (paragraph 26) and the Secretary of State’s power to vary percentages (paragraph 30).
Deferred members who have not attained normal pension age at assessment date
584.Paragraph 15 provides that 90% pension compensation will be paid to deferred members who have not attained normal pension age. The pension compensation paid is calculated by reference to the accrued protected pension plus the revaluation amount. This is subject to the compensation cap (paragraph 26) and the Secretary of State’s power to vary the percentage (paragraph 30). The pension comes into payment from the deferred member’s normal pension age and part may be commuted as a lump sum (see paragraph 24).
585.Paragraph 18 provides that 50% of the pension compensation in payment or payable will be paid to the deferred member’s widow or widower after he dies. Regulations will set out when the widow or widower will not be entitled to compensation. This will allow provision to be made for cases where the scheme rules did not pay a pension to a widow or widower.
586.Paragraph 19 sets out when lump sum compensation is payable from normal pension age. 90% of the lump sum to which the deferred member was entitled under the scheme rules (referred to as admissible rules) will be paid. This does not apply to a lump sum received through commutation. This is subject to the compensation cap (paragraph 26) and the Secretary of State’s power to vary percentages (paragraph 30).
Compensation in respect of scheme right to transfer payment or contribution refund
587.Paragraph 20 sets out when a person is entitled to a lump sum of 90% of a protected transfer payment or protected contribution repayment. This is paid where a person’s pensionable service terminates on the commencement of the assessment date and as a result he has a right to a transfer payment under the scheme (‘the protected transfer payment’) or a cash payment which refunds his contributions to the scheme (‘the protected contribution repayment’). This is paid immediately after the Board issues the transfer notice under section 160.
588.Regulations may modify paragraphs 8, 10, 11 or 14 as they apply where a person is entitled to compensation under this paragraph.
Pension credit members who have not attained normal benefit age at assessment date
589.Paragraph 21 applies paragraphs 15, 18 and 19 to pension credit members, with certain modifications, as if those paragraphs applied to them. The term normal benefit age is used for pension credit members rather than the term normal pension age.
Survivors who do not meet conditions for scheme benefits at assessment date
590.Paragraph 22 provides that pension compensation may be paid to a survivor who became entitled to a pension after the assessment date as a result of the death of a member before the assessment date. The pension must be one which is paid to the survivor as a result of satisfying conditions in the scheme rules. It must also be paid in respect of the deceased member’s pensionable service. The amount paid will be 100% of the pension which would have been paid by the scheme if entitlement had arisen before the assessment date plus any increases under paragraph 28. This is subject to the Secretary of State’s power to vary percentages (paragraph 30).
Compensation in form of dependants’ benefits
591.Paragraph 23 provides that regulations may provide for compensation to be payable to partners and dependants of prescribed descriptions.
Commutation of periodic compensation
592.Paragraph 24 provides that a person can commute part of his pension compensation as a lump sum but cannot commute more that 25% (this percentage may be changed by the Secretary of State). The amount paid as a lump sum will be 25% of the pension compensation payable after reductions are made to take account of the compensation cap. The lump sum payable will be the actuarial equivalent of the commuted portion of the pension compensation calculated from tables designated for this purpose by the Board. Regulation may set out the manner in which the option to commute may be exercised.
Early payment of compensation
593.Paragraph 25 provides that regulations may prescribe when a person may receive pension compensation and lump sum compensation before his normal pension age. This applies to active members and deferred members under normal pension age. The Board will determine the actuarial reduction to be applied to compensation paid early under this paragraph.
Compensation cap
594.Paragraph 26 makes provision for the compensation cap. This is the amount which will be specified by the Secretary of State by order. The compensation cap is expected to be £27,777 in the first year for persons who are aged 65. Paragraph 27 requires him to increase the amount specified where a review under section 148(2) of the Social Security Administration Act 1992 concludes that there has been an increase in the general level of earnings.
595.The compensation cap will apply to persons in receipt of a pension from a scheme before the assessment date who were under normal pension age when the pension commenced and were not eligible for the pension on the grounds of ill health (paragraph 3). It will also apply when active members and deferred members under normal pension age become entitled to pension compensation and/or lump sum compensation (paragraphs 11, 14, 15 and 19). The compensation cap will apply at the date when a person became entitled to pension compensation. It may be actuarially adjusted if the person had not attained 65 or was 66 or over at the date when he first became entitled.
596.Where the member was entitled to a pension or other benefit under the scheme rules and this exceeds the compensation cap, he cannot receive more than 90% of the cap. If the total were less than the cap then he will receive 90% of that amount. Where a pension was already in payment (where under normal pension age) and part of it had been commuted, the amount used for the purpose of calculating pension compensation will be the full amount of the pension before commutation and this total will be reduced to the level of the compensation cap, if it exceeded it. If a lump sum had already been paid then it will be added to any pension in payment for the purpose of calculating pension compensation. If this total exceeds the cap then no more than 90% of the cap can be paid as pension compensation.
597.When calculating the total benefits to which there is entitlement under the scheme, account will also be taken of benefits received from connected occupational pension schemes. Regulations will also provide that paragraph 26 will apply with modifications where a person becomes entitled to pension compensation and had previously been entitled to compensation in respect of benefits under the scheme or a connected scheme or became entitled to one or more lump sums under the scheme or a connected scheme. A scheme is a connected scheme if it has the same employer.
598.Regulations may also prescribe sums to be disregarded for the purpose of paragraph 26.
Annual increase in periodic compensation
599.Paragraph 28 provides that pension compensation will be increased each year by the lesser of the increase in retail price index and 2.5% (‘the appropriate percentage’). This will apply to the portion of the pension compensation which relates to the member’s service in the scheme after 6 April 1997.
Board’s powers to alter rates of revaluation and indexation
600.Paragraph 29 provides that the Board may determine the maximum revaluation rate for the purposes of paragraphs 12(4) and 17(4).
601.The Board may also determine the ‘appropriate percentage’ for the annual increase in pension compensation under paragraph 28. This can only apply to future increases and can apply to all cases or those cases where entitlement arose after the determination.
602.The Board must consult persons it considers appropriate and publish details of the proposed determination as it considers appropriate. It must consider any representations made.
Secretary of State’s powers to vary percentage paid as compensation
603.Paragraph 30 provides that the Secretary of State may on the Board’s recommendation vary any of the percentages listed in paragraphs 3(4)(a) and (b), 5(3), 7(2), 8(3), 10(2), 11(3), 14(3), 15(3), 19(3), 20(3) and 22(3).
604.The Board must consult such persons it thinks appropriate and publish details of the proposed recommendation in relation to the percentages, in such manner as it thinks appropriate. It must consider any representations made.
Special provision in relation to certain pensions in payment before the assessment date
605.Paragraph 31 applies to cases where immediately before the assessment date a person is in receipt of a pension, but because of the definition of “admissible rules” in paragraph 35(2) he is not entitled to compensation under paragraph 3. Paragraph 31 provides that regulations may allow for the pensioner to be treated for the purposes of the pension compensation provisions as entitled to a pension from the scheme before the assessment date and for the compensation payable to be determined as prescribed (any provisions of this Schedule may also be applied with modifications as prescribed). Regulations may also deal with any entitlement to compensation in respect of the pension which arises other than under paragraph 3.
Short periods of service which terminate on commencement of assessment date
606.Paragraph 32 applies where a member’s pensionable service is terminated on the commencement of the assessment period and, as a result, the member has a right to receive a cash transfer sum or contribution refund under Chapter 5 of Part 4 of the Pension Schemes Act 1993. The member will receive compensation in the same way as other active members of the scheme as if they had rights to long service benefit and did not have any other rights to benefits under the scheme.
Power to modify Schedule in its application to certain schemes
607.Paragraph 33 provides that regulations may modify the Schedule as prescribed where the scheme is a prescribed scheme or a scheme of a prescribed description. This power may be used to facilitate payment of benefits to members of cash balance schemes.
Normal pension age
608.Paragraph 34 defines normal pension age as the age specified in the scheme’s rules (referred to as admissible rules) as the earliest age at which the scheme pension or lump sum becomes payable without actuarial adjustment (excluding any rule making special provision as to early payment on grounds of ill-health or otherwise). Special provision is made where there are different ages for different parts of a pension or lump sum. If it is not possible to identify the normal pension age from the scheme’s admissible rules the Board can decide how the normal pension age is to be determined having regard to those rules.
Scheme rules, admissible rules etc
609.Paragraph 35 defines the meanings of admissible rules, recent rule changes and recent discretionary increases.
610.Admissible rules means the scheme rules, but disregarding, in certain circumstances, all recent rule changes (including any rules which come into operation as a result of winding-up or an associated event). A recent rule change is disregarded if before the assessment date the combined effect of the change, and any recent discretionary increases, was to increase the protected liabilities of the scheme.
611.Recent rules changes means a change which took effect three years before the assessment date or were made during the three year period (and took effect before that period). In addition any scheme rules which come into operation by reference to an insolvency event in relation to the employer or any prescribed event in relation to the employer, are also included as “recent rule changes”. Sub-paragraph (6) lists rule changes which are exempted. These include, for example, changes required by any enactment or changes of a prescribed description.
612.Recent discretionary increases means an increase in the rate of a pension in payment or a postponed pension which took effect in the three years before the assessment date or was introduced during that period with effect from an earlier time Sub-paragraph (8) provides that certain increases may be disregarded.
Accrual rate, pensionable service and pensionable earnings
613.Paragraph 36 defines the meaning of accrual rate, pensionable service and pensionsable earnings.
Other definitions
614.Paragraph 37 defines deferred member, normal benefit age, pension credit member, pension credit rights, retail prices index and the scheme.
615.References in the Schedule to a pension or lump sum or a right to such, do not include money purchase benefits.
616.Regulations may be made in relation to the meaning in this Schedule of references to ill health.