The government intends to change Pension Protection Fund (PPF) rules to fix an anomaly affecting members receiving a bridging pension.
The change will mean members receiving a bridging pension at the higher rate when they enter the scheme will no longer maintain the same rate for life.
Bridging pensions allow individuals who retire before reaching state pension age to be paid a higher rate of pension initially.
The bridging pension then reduces when the individual begins to receive their state pension or reaches an age specified in their pension scheme rules.
For some members this anomaly means that they may be financially better off in the PPF than they would have been under the rules of their scheme, since the amount of compensation they receive may exceed the amount they would have received had their scheme not entered the PPF.
Currently these members also take a disproportionate amount of scheme assets when their scheme enters a PPF assessment compared with other members of the scheme who are not in receipt of a bridging pension, the DWP said.
The proposed changes will enable the PPF to reduce compensation payments so that the compensation received by these members, in this respect, more closely reflects the benefits that they would have received in their pension scheme.
It will also ensure greater parity of treatment between members in the PPF and the Financial Assistance Scheme (FAS) which already takes account of bridging pensions.
The aim of the consultation is to gather views on the benefits and any possible unintended consequences of these draft rules.
The government is seeking evidence from scheme administrators on whether the proposed approach to smooth a member’s compensation payments would create significant operational difficulties.
The DWP wants to know from scheme members what the practical implications of receiving a fixed rate of PPF compensation, subject to indexation, for life will be
Malcolm McLean, senior consultant at Barnett Waddingham, said he understood the logic behind the proposed amendment.
He said: “The PPF was designed as a lifeboat fund to provide a level of protection towards the members’ pension benefit entitlements when the employer became insolvent and the scheme had insufficient funds to fully meet all its liabilities.
Mr McLean added that it was never the intention that someone should be better off long term than they would have been had the scheme continued in existence and not entered the PPF.
“This amendment properly seeks to close a loophole that clearly now exists,” he added.
Nathan Long, senior pension analyst at Hargreaves Lansdown, said this amendment “simply makes the compensation payable under the PPF a more accurate reflection of the lost pension, making it fairer for all”.
Mr Long said this change “affects only a fairly small group of people”.
But, if not addressed, compensation from the PPF would not drop down when the entitlement to state pension kicks in, like it would have done under the original scheme, he said.