Here are some things you didn’t know about the Pension Protection Fund (PPF). If you are in a pension scheme heading in that direction you should read this!
While most people think it would be an unmitigated disaster to see their pension scheme fail and their benefits sink beneath the waves, the PPF lifeboat can – in certain circumstances – provide not just a lifeboat, but a wonderful alternative. It could be like being washed up on a desert island! 
It’s all about “actuarial equivalence” applied to tax-free- cash commutation” and “early retirement factors”!
If that last sentence hasn’t blown your mind, then read on as it should get easier.
Actuarial science made simple!
In theory every calculation that an actuary does should be fair and provide equivalent benefits to one party as it does to the other.
In practice this doesn’t always happen. Actuaries have a number of ways of calculating things which can skew “fairness” in the direction of one party or another.
One such case is the calculation of how much pension you have to give up to get a pound’s worth of tax free cash.
Another is the amount of pension you can get if you retire early
Have a look at this tasty little table – cooked up by Nicole – actuarial doyenne of our Basingstoke office.
She’s compared a “model scheme”- one she’s prepared earlier, with the benefits you’d get if the scheme sunk and the PPF came along a life boat.
So what does this tell us?
Well it shows that if you waited till 65, you’d have done better in your private scheme, so long as you weren’t taking your tax-free-cash
And it also shows you’d be better off using the Pension Protection Fund if you retired early, even if you took all your benefits at 60 as pension
Using her ace actuarial skills, Nicole can show you’d get more tax-free-cash out of the PPF whether you retired at 60 or 65.
What’s more you’d get a larger residual pension from the PPF – even though you’ve taken more tax free cash!
True you’d give your spouse a smaller pension if you conked out day one but even then the value of the package of benefits offered you by the PPF would be higher at 65 and at 60 .
HOW CAN THIS BE?
All benefit were created equivalent but some are more equivalent than others!
The PPF actuarial factors for swapping pension for cash are around 26;1 whether you’re going cash to pension or pension to cash.
But the actuarial factors for the private scheme swapping (commuting) pension for cash are 12;1 reducing both the value of taking tax-free-cash and the value of your pension if you retired early.
Now of course Nicole’s model scheme is one that proves the point and not all schemes have the same differential between their “commutation factors”. Sometimes, the PPF won’t look as good! There are all kinds of bells and whistles that might be offered by a private scheme that aren’t offered by Nicole’s model scheme and all of this could make the private scheme more attractive.
And if you are a high-roller with a big fat pension the PPF will not be nearly as much fun – even if you were in Nicole’s model scheme.
The point is you should not despair if you are heading for the PPF lifeboat!
Infact if you were to call into our Basingstoke and spoke with Nicole, she would be able to explain all kinds of things about defined benefit schemes that neither you or I knew (unless you too were a Doyenne).
Things are not always as they seem in the Alice in Wonderland world of actuarial science!
And actuaries are not always what you thought they’d be – especially when they are doyennes!
Why does this matter?
This matters a lot if you are about to go into the PPF and it matters even more if you are faced with the choice of going into the PPF or staying in the scheme you’re already in.
That was the choice that faced Kodak Scheme members a couple of years ago and it’ll be the choice of British Steel Pension Scheme members in the next few months.
It is almost impossible to get your head round how actuarial equivalence can provide such a odd results.
I am not an actuary but I know enough about money to know this is really important. People should not be taking decisions without knowing how all this works .
Unfortunately – people take decisions on what kind of pension they want (or don’t want) all the time often without the basic information needed to make a choice.
If you feel strongly about this -you should talk to The Pension Advisory Service or Pension Wise (if you are over 50).
If you want more help, you can contact henry.h.tapper@firstactuarial.co.uk and I may be able to find you someone to talk to, who really understands these things.
Commutation has another unfortunate lesson. If you are in a scheme with lousy commutation factors then pump in 33% by value in money purchase AVCs if you can and take them all out as a lump sum (no commutation factor needed). It’s what I did for my partner in the LGPS. Do the calculations with the tax element in and it’s a great return even if the AVCs are in boring index linkers.
It’s a great ploy Peter! It makes the AVC (as a trustee investment) a much better bet than a non trustee investment into a personal pension . There seems to be a risk that Trustees disallow the taking of AVCs as cash – would any trustees/advisers care to comment? Does anyone know what the position of taking AVCs as cash with the PPF is?
Well that’s all very nice if you had ‘a reliable crystal ball’ that tells you in which direction a DB fund or an AVC fund is going! Trouble is us pensioners do not have one or a government that protects what they call ‘our benefits’ as they are shy of admitting we should have any ‘rights’ and even if we had those we most likely would have to be defended by court action that pensioners have no hope funding or wish the hassle once reaching their NRD! I would say that for PPF read FAS the latter being the biggest disaster of government policy completely flawed by malfeasance by ignoring court action! Never has government since 2004 addressed the losses of pensioners by giving us the 90% promised or properly funding payouts back to our NRDs or given any proper indexing since said date. We have never received our due resulting from judicial review or the reports of Parliamentary Ombudsmen who have failed to press our claim for government to properly address current rules! So since the Millennia us pensioners are each year ie nearly two decades or more getting annually poorer! If only we had that crystal ball to protect us from the ‘encouragement’ that government gave to get involved with company DB schemes and AVCs that also crashed if in Equitable Life!
Peter D Beattie – PPF/FAS/Equitable Life Pensioner
Henry. I do not know about the PPF rules of cash payouts as they come under the umbrella of the professionals of the commercial organisations but FAS now administered by PPF (offloaded of course by government saving them responsibility and admin costs) keep any money very close with their punitive rules! I cashed in my AVC after company administration on reaching NRD but reinvested a small personal pension both with Equitable Life and the latter gives me a small return each month from Standard Life. Anyone who had a AVC with Equitable Life administered by any group pension scheme has a hard time getting Trustees to response as to how much compensation they are due which by the way is still an outstanding claim on-going with whichever government rules since the Equitable Life disaster!
Peter D Beattie – Pensioner