Schemes urged to review PPF and FAS protection

Under the changes, schemes whose sponsor does not meet the statutory definition of employer needed for financial assistance will qualify for the FAS, where the link with the last statutory employer was lost before June 2011.

All schemes, whether or not their sponsor is approaching an insolvency event, should review their deeds of participation and trust deed and rules, to work out whether employers meet the criteria of protection under the Pension Protection Fund (PPF) or the FAS.

This will ensure they have the right safety nets for the worse case scenario of their employer going bust, so that members retain at least a proportion of their retirement savings. 

The FAS, which is now managed by the PPF board, pays up to 90% of a member's accrued pension, if an eligible scheme winds up without sufficient funds to pay members, or the employer experiences insolvency.

The consultation is the last chance for schemes to confirm whether their employer qualifies them for this protection, said the Department for Work and Pensions, as it does not intend to make further time extensions to FAS.

It calls upon trustees to be “vigilant and ensure that their schemes do not lose their connections to an employer meeting the statutory definition”.

Anne-Marie Winton, a partner at Nabarro, said it was “vital” to work out who are the statutory employers and former employers in a scheme.

She said: “This is often not easy to pin down, as the answer often depends on movements of employees in and out of companies and minimum funding requirement funding levels years ago.”

Some schemes might want to retain a strong sponsor despite it not qualifying them for PPF or FAS protection.

Sasha Butterworth, a partner at TLT, said: “Schemes might want to keep the sponsoring employer, despite the fact they realise if there is an insolvency event after July 10, 2011, they are not going to fall within the FAS or the PPF.”

One way to retain protection would be to have the employer put an active member into the scheme to meet the PPF requirement, she suggested.

These decisions are crucially based on data quality. When determining the relationship of members with participating employers, some schemes discover “orphan members” where the link has been lost.

This problem has been surmounted by some schemes through redistributing those members among the other employers in the scheme.

Catch-up

The FAS draft regulations have been designed in mind of the George & Harding pension scheme, which was taken over by a firm in 2002 when it was already closed, meaning the company was not a statutory employer under 2004 legislation.

Saga director Ros Altmann, who had campaigned for a government solution to the problems of the George & Harding scheme, welcomed the consultation.

She said: “It is absolutely essential trustees ensure their principal employer is in the legal definition a statutory employer.”

She added every scheme needed to take legal advice on this issue, and called on the PPF to include in its levy demand to schemes a call to all schemes to review their employers.

Schemes wishing to enter into the FAS now have to meet the following, revised conditions:

1. The scheme began to wind up between December 2008 and the start date of the new legislation;

2. The statutory employer went insolvent before April 6, 2005;

3. The link between scheme and statutory employer was lost before June 10, 2011.

The government took also this opportunity to redraft the law around the FAS.

One area affecting schemes is the underpin arrangements for those transferring assets to government, and ensuring that members receive the “appropriate value for the money purchase pot”.

There are two options the government is considering:

1. Requiring schemes to discharge the money purchase underpin pot, where it exceeds the defined benefit pension, before transferring the assets across to the FAS.

2. To convert the money purchase underpin pot into a notional pension and give FAS assistance on that amount.

The government is inviting feedback on this element of the consultation, as well as the timing of those calculations to be made, by September.