Potential changes to the way the PPF’s compensation is calculated and paid could have an impact on its 7800 index and some schemes in its assessment period, as Nick Reeve reports.
Last month’s Budget brought some long-awaited good news to members of the Pension Protection Fund (PPF) and Financial Assistance Scheme with benefits accrued before 1997.
The government intends to change the rules governing the PPF to allow it to use some of its reserves to link future compensation payments to inflation – something members had been missing out on for almost 30 years.
However, as the change is forward-looking, it means that any pension schemes entering the PPF in the future will be affected. This has required the lifeboat fund to reassess how it calculates its PPF 7800 index, a leading measure of the solvency position of defined benefit (DB) schemes.
A healthy surplus… for now
The latest edition of the index shows an aggregate surplus of £257.6bn across the 4,838 schemes covered at the end of November. This is measured on a section 179 basis, meaning it reflects the level of benefits needed to match PPF compensation.
Total assets dropped slightly during the last month, down by 0.2%, while liabilities fell marginally more, leaving a funding ratio of 129.9%.
With indexation set to kick in once the Pension Schemes Bill receives Royal Assent, the PPF must now reassess section 179 liabilities to take into account any pension schemes in its universe that have pre-1997 benefits and include them in its calculations.
How the PPF will pay inflation-linked compensation to FAS members
Increases to pre-97 benefits will be capped at 2.5%, and will only apply to people whose original schemes provided for mandatory indexation on pre-97 pensions, the PPF explained in a press statement following the Budget. Read the full details.
While the details of the indexation rule change are yet to be confirmed, the PPF estimated that including indexation in the 7800 index could push liabilities up by around 12%.
Based on 31 March 2025 figures, such a change would increase liabilities to £956.7bn, and reduce the overall funding ratio of the index to 111.6%, down from 125% under the most recent assumptions.
In the latest edition of The Purple Book, the PPF’s annual DB data analysis document, the lifeboat fund reported that more than three-quarters of schemes provided some form of indexation on pre-97 benefits.
The PPF emphasised that the actual impact on the 7800 index “will depend on the final legislation that is brought into force”, adding that “the result would be different under different criteria/assumptions”.
The potential impact on DB schemes
Sarah Elwine, actuarial director at Broadstone, said any future update to the 7800 index was “unlikely to impact funding or route to buyout for most schemes”. She added that the Budget announcement was “undoubtedly… a boost to PPF members by protecting them against the loss of purchasing power from their pensions, which had been eroded by inflation over the past three decades”.
However, Hywel Robinson, a partner at law firm Temple Bright, said in a LinkedIn post that trustees of schemes in or entering the PPF’s assessment period “may need to tread carefully”.
Pension schemes entering the PPF’s assessment period measure their assets and liabilities as they were immediately prior to insolvency. This is then used to ascertain whether the scheme is eligible for PPF compensation or can secure a better outcome elsewhere, such as through an insurance buyout or transfer to a superfund.
Robinson pointed out that, in some cases, schemes could see their situations change once the Pension Schemes Bill comes into effect and compensation calculations are required to include indexation of pre-97 benefits.
“Once the law changes, the trustees may suddenly find that the scheme is underfunded, and their members would be better off within the PPF,” he explained. Such situations would require “careful management”, Robinson indicated.
