The government is changing the rules of the Pension Protection Fund (PPF), as soon as next month, to fix an anomaly affecting members receiving a bridging pension.
According to a consultation outcome published yesterday (29 January) by the Department of Work and Pensions (DWP), these changes, which are subject to parliamentary procedures, will mean any scheme entering PPF assessment on or after the date the regulations come into force will be subject to the new compensation rules.
There will be no impact, however, on members of those schemes which entered the PPF before the regulations come into force.
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 - their pension decrease date.
At the moment, the PPF doesn’t have the ability to reduce the members’ pensions, which means that some individuals would be financially better off in the PPF than they would have been under the rules of their scheme.
This change was especially important as the pensions lifeboat is going to absorb the British Steel Pension Scheme (BSPS) members that didn’t choose to go to the new scheme being created, BSPS II.
After a consultation on the draft rules to change this anomaly launched in August, which closed on 1 October, the DWP concluded it would take a scheme rules based approach to solve the pensions lifeboat anomaly.
This will allow the PPF to move members to a lower rate of compensation after they reach their pension decrease date.
The other option was to convert the bridging pension into a notional flat-rate, lifetime-equivalent amount, and basing compensation on that notional pension, called the smoothing approach.
In this option, members would experience an initial reduction in income, even though the actuarial adjustments were intended to ensure that they wouldn’t be worse off over their assumed lifetime.
According to DWP, the consultation responses highlighted that the bridging element may represent a significant proportion of a member’s overall pension, and individuals who had factored the initial higher payments into their financial plans could find it difficult to plug the income gap, following the initial reduction on entering the PPF assessment period.
This could cause “hardship if members experienced difficulties in meeting financial commitments until they start receiving the state pension”, which is why this wasn’t the chosen option, the government added.
The DWP is also changing the terminology in PPF regulations, since bridging pension is a term widely used in industry to refer only to the initial, temporary additional amount that a member receives on top of their main lifetime pension entitlement – the bridging element.
“For clarity, we have amended the regulations so that this type of pension arrangement is now referred to as a ‘step-down pension’,” the government added.