PPF to cover costs of scheme Fraud Compensation Fund claims

The FCF is operated and administered by the PPF, under the terms of the Pensions Act 2004. The fund is designed to provide compensation to defined benefit and defined contribution schemes that have seen their assets reduced as a result of fraud, and where the sponsoring employer has become insolvent.

Claims on the FCF have historically been small and few in number, but a decision by the High Court in November 2020 mandated that certain scam schemes would be eligible to make claims on the FCF if certain criteria are met, resulting in a vast potential increase in claims for which the FCF lacked the funds to meet.

Consequently, the DWP was empowered, in 2021, to make loans to the FCF. The loan totalled around £250mn over the period until 2025, and is intended to cover 131 schemes. It will be repaid via the fraud compensation levy, which had its ceiling increased in April 2022.

It is thought that between 70 and 85 per cent of eligible schemes have seen all or most of their assets exhausted, however, whether as a result of dishonesty or from the costs of investigating that dishonesty, and progressing their FCF applications. 

Most of these schemes have independent trustees appointed by the Pensions Regulator, which imposes its own costs, and these must be met using scheme assets where it is impossible to recover money from the statutory employer.

It has therefore been deemed necessary that these schemes require interim funding to cover such costs as are necessary for investigations to be carried out and claims to be made, and the consultation proposes creating an additional prescribed liability so that the board of the PPF can cover fees and costs.

Interim payments

Under existing legislation, the PPF board cannot make fraud compensation payments until the settlement date, determined by the board as being the point beyond which further recoveries are unlikely to be attained by the trustees “without disproportionate cost or within a reasonable time”, the consultation explained.

Interim payments, made between the date of the application and the settlement date, are allowed when certain conditions are met. These conditions are that the scheme is an eligible occupational scheme, the employer is insolvent, an application to the FCF has been made, and the PPF board believes the value of the scheme’s assets has been reduced by things such as fraud and dishonesty.

However, the regulations as they stand are “of little practical use” to the type of scheme made eligible by the High Court judgment, necessitating a change.

Consequently, the consultation proposes creating an additional liability enabling the PPF board to make interim payments to cover the costs of FCF applications.

“These liabilities represent costs the trustees or managers would already incur as part of the FCF application process, had the scheme had sufficient assets to cover them,” the consultation stated. 

“Where the scheme has sufficient assets to cover them, these are typically costs that the board compensates when it makes fraud compensation payments, such as trustee, legal and accounting fees associated with investigating potential dishonesty, gathering evidence and making recoveries.”

The change does not cover the business-as-usual costs of running the scheme, but solely those arising from FCF-associated costs — and interim payments would be made entirely at the discretion of the PPF board.

Any interim payment would have to be taken into account alongside any recoveries of value made by the scheme, meaning the proposed change would not impose additional costs on the FCF when the board pays compensation to the scheme, as the payments will be deducted from the final amount.

Though trustees may incur “negligible familiarisation costs in relation to PPF guidance”, and the PPF itself may face increased administrative costs, this is not expected to impact the PPF administration levy.

“This proposed change represents a proportionate and timely way to provide interim funding to these schemes. The change facilitates access to compensation for eligible schemes where other forms of redress have been pursued,” the consultation explained.

Child dependants

A second proposed change is designed to close a loophole that currently exists concerning surviving child dependants.

PPF rules state that a child dependant who has a gap in education for more than a year forfeits their right to PPF compensation relating to a deceased relative, which they would otherwise be entitled to receive until they reach 23 years of age.

However, in many instances, more than a calendar year may elapse between the completion of A-levels and the beginning of a university course — for example, where the student is taking a gap year — and under current rules the child would lose their entitlement to PPF compensation upon completion of the former. This entitlement would not then be reinstated at the beginning of the university course.

The consultation explained that this was not the intended effect of the legislation, and so an amendment has been proposed that would remove the requirement that any gap between qualifying courses should be less than one year. 

“Payment can then be made to surviving child dependants from the start date of a further qualifying course, provided that course begins before the child reaches age 23,” it said.

It is not thought that this change will affect many people. As at April 5 2022, the PPF was paying compensation to just 480 surviving child dependants and “only a small subset of these will be impacted” by the amendment. Consequently, the cost to the PPF is likely to be negligible and will have no bearing on PPF levies.

LCP partner Sir Steve Webb told Pensions Expert: “These two separate proposals are largely tidying-up measures designed to give the PPF powers to make payments in scenarios which were not necessarily foreseen when the original rules were drawn up.   

“For example, the PPF may make payments to child dependants up to the age of 23 if they remain in full-time study, but any interruption of more than 12 months in study can result in support being terminated.  

“The new rules will enable PPF support to resume after an interruption to study, and this seems like a sensible tidying-up measure in line with the original policy intent.”