From April this year your company pension has been made safer. You might think it was safe anyway and of course most of them are. But over the last eight years more than 80,000 people have found out the hard way that a company pension which is promised may not be the pension that is paid. After much pressure and bad publicity, the Government finally pulled two rabbits out of the hat – one cottontail offers some protection for pensions paid from schemes that get into difficulty from 6 April 2005. And a scrawny coney holds out rather less help to some of the people whose pension scheme got into trouble before that.

These new protections only apply to schemes that promise a pension related to your pay. Such schemes are getting rarer. Schemes which simply save up money for you in a stakeholder or money purchase scheme are not covered. They make no promises about what pension you will get. So however little it is, no promise has been broken.

Pension funds are held not by the company that pays into them but by independent trustees. The separation of the fund from the company was strengthened after it emerged in 1991 that Robert Maxwell had stolen £480 million from the Mirror Group pension fund before his death. Trustees were also given the duty to make sure there was enough money in the fund to pay the pensions that have been promised. The problem is that this so-called ‘minimum funding requirement’ devised in the 1990s does not achieve that. As long as the company that promises the pensions is trading and solvent that does not really matter. It has a duty to pay sufficient into the fund to make sure the promises are kept. And recently many large companies have paid very large sums into their funds for that purpose. But if the company goes bust or stops trading then the scheme has to go into a different mode. It is ‘wound up’ and the fund is used to buy annuities to continue the pensions of retired members and to provide pensions for those who will retire in future. The rules state that existing pensioners have the first call on this money and they normally continue to get their full pension. Those who have not retired then share out what is left, which is usually not enough to pay their pensions in full. Around 40,000 people have been left with half or less of the pension they had been promised.

Pension Protection Fund
From 6 April this year pension schemes will not be wound up in the same way. Their assets will be taken over by the new Pension Protection Fund (PPF) which will then pay out a proportion of the pension that has been promised. Those already at the scheme’s pension age when it is wound up will get 100 per cent of their pension. But the cost will be cut by two things.

These restrictions will also affect the pensions paid to widows and widowers who will get no more than half the pension the member would get from the PPF.

The money for these pensions will come first from the assets of the funds which the PPF takes over. Second, all live pension funds will pay an annual levy to the PPF. Next year that will raise around £300 million. The PPF believes it will have sufficient to make the payments that the Fund is currently offering. But there is a long-term power to cut the benefits further if the Fund begins to run out of money.

A few months ago the chairman of the PPF warned that there were ‘unscrupulous employers’ out there waiting to wind up their pension schemes and dump the problem on the Fund. To stop that happening, the Government also created a powerful new Pensions Regulator who has to protect the benefits of pension scheme members and to reduce the risk of schemes calling on the PPF. To that end he can take action to force companies or their directors to pay money into the scheme. How these tough powers will be used remains to be seen, and of course they will be harder to enforce if companies are registered abroad.

The Regulator also has powers to make sure that schemes are being run properly so that they will not have to call on the PPF. In future employers may be required to put more money into pension funds to make sure there is enough there to meet the promises made to employees. That, and the annual levy, will make the cost of running company pensions more expensive and that could lead to more of them being closed to new members and will certainly discourage employers from starting new schemes.

Despite these problems, there is no doubt that the PPF is a big step forward. And employees who work for a company with a good, salary-related pension can pay into it with much more confidence.

Financial assistance
The Government has done less though for the victims of pension scheme problems which occurred before the PPF began. They are covered by a separate and much less valuable plan called the Financial Assistance Scheme (FAS). If your company pension scheme went into wind up between 1 January 1997 and 5 April 2005, then the FAS may help you, though some schemes which may still come under PPF even though their problems occurred before 6 April.

Unlike the PPF the FAS will not take over the assets of the closed pension funds which will still buy annuities to pay existing pensioners in full and whatever it can afford for those not yet retired. When they do retire, they will normally get far less than they were promised. That is where the FAS comes in – to top up these reduced pensions. But it will only do that for people who reach the pension age for their scheme by 14 May 2007 or earlier. Younger people will get nothing. Only around 15,000 people will benefit – out of the 80,000 the government says have lost some of their pension since the start of 1997. And even for those who do benefit, the top up will be limited. They will get just eighty per cent of the pension they were expecting subject to a cap of £12,000. If anyone is due less than £10 a week then nothing will be paid to them. Widows and widowers will get half the top benefit due to the member.

Three restrictions will limit the value of these top-ups still further. First, everyone will have to wait until there are 65 to get anything, even if their scheme pension age was 60. So someone whose company scheme got into trouble in the early years of this century, who was 57 on 14 May 2004 and who expected to draw a pension at 60 in May 2007 will now have to wait until they reach 65 in May 2012. Second, there will be no inflation proofing. So if inflation stays around 3 per cent, their pension will have halved in value in 20 years.

The cost of the FAS will be met by taxpayers. The Labour government committed £400 million over twenty years – around £20 million a year. Between the 15,000 people who are estimated to be eligible that will represent an average payment of £1333 a year - £25 a week – each.

Financial Assistance Scheme or call 0845 60 60 265

Pensions Regulator  or call 0870 241 1144