The Department for Work and Pensions (DWP) has launched a consultation on proposed changes to the Pension Protection Fund (PPF) compensation cap, which would increase the potential compensation for long-service pension plan members.

At present, members who have not yet reached their pension plan’s normal pension age when their plan enters the PPF are paid compensation that reflects 90 per cent of their accrued pension, subject to a maximum cap. This cap is currently set at £37,420.42 for 2016/17, which means that compensation at age 65 would be £33,678.38.

Many members and pensions activists have long campaigned for this cap to be amended to recognise long service and loyalty. This resulted in the then-pensions minister, Steve Webb, introducing primary legislation in 2013 to increase the compensation limit for long-serving members. However, while the changes were included in the Pensions Act 2014, they are still not yet in force.

The start of this consultation potentially signals the end of these delays, and pensions minister Richard Harrington has confirmed that he expects the long service cap to be effective from 6 April 2017.

Once in force, the amendments to the Pensions Act 2004 will increase the standard compensation cap by three per cent for each full year of pensionable service above 20 years, subject to an overall maximum of double the standard limit. The proposed amendments will also make provision for:

  • individuals whose actual pensionable service is unclear or which does not take into account transfers from a previous plan;
  • individuals in receipt of capped compensation when the legislation comes into force; and
  • pension plans in an assessment period or which are winding up when the legislation comes into force.

The consultation will run for eight weeks and the DWP would like respondents to confirm “whether the draft Regulations achieve their intended purpose, whether the long service cap operates appropriately in the situations covered by those draft Regulations, and that all necessary changes have been identified”.

With the PPF currently in surplus, the changes should not impact too significantly on its funding – though sponsoring employers and trustees of defined benefit plans may be wary that PPF levies could increase in years to come as the PPF looks to balance its increased costs with maintaining a healthy buffer.

Finally, in a separate but related recent development which we also reported on in August, the Court of Appeal has provisionally ruled that the current PPF compensation cap may be incompatible with European law, and has referred the question to the Court of Justice of the European Union. With the outcome of that reference (and the extent to which it will be affected by Brexit) still unclear, the changes to the compensation cap proposed by the consultation may not be the last we see over the next few years. Watch this space!