The compensation cap is used to determine the level of compensation payable by the Pension Protection Fund to certain individuals. Paragraph 26 of Schedule 7 of the Pensions Act 2004 sets out the circumstances in which the compensation cap applies. Paragraph 27 of Schedule 7 of the Pensions Act 2004 sets out how and when the compensation cap should be increased.
The compensation cap is also used in valuation calculations required under Section 179 (risk-based levy calculations) and Section 143 (entry calculation) of the Pensions Act 2004. The application of the compensation cap is described in the two corresponding Valuation Guidance documents prepared by the Pension Protection Fund.
The compensation cap is subject to an annual review with effect from 1 April to reflect the increase in the general level of earnings in Great Britain since the previous tax year.
The compensation cap varies with the scheme member's age last birthday. The following tables should be used for calculations of PPF compensation, Section 143 and Section 179 valuations with effective dates:
The compensation cap adjustments are calculated so that, for example, two early retirees in the same scheme who are both subject to the compensation cap would receive the same actuarial value of benefits from the PPF. So although a capped 57 year old would receive a higher PPF pension than a capped 55 year old, the actuarial value of benefits for the two would be the same because the younger member is expected to receive compensation for a longer period of time.
Factors to calculate the annualised value of a lump sum
The compensation cap must be compared with an annual value of benefits. The actuarial factors required by paragraph 26 (7) of Schedule 7 of the Pensions Act 2004 for determining the annualised value of a lump sum are set out in the tables below. These factors will be reviewed from time to time.
These factors apply to cash lump sum benefits which have accrued alongside pension benefits. These lump sums are sometimes referred to as separate scheme lump sums. The factors for ages under age 50 may be required for the purposes of a Section 179 valuation where cash lump sum benefits have accrued on death before retirement.
These factors do not apply to lump sums resulting from the commutation.
The following tables should be used for determining the annualised value of a lump sum for calculations with effective dates:
September 2016 - We have decided not to implement the factor changes that we had planned for October 1st. We regularly check and update our actuarial factors to ensure the PPF is financially no better or worse off if people choose to take options such as early retirement or a lump sum. We had planned to move to the new factors from October 1st. However, given market movements we have concluded that they would no longer be actuarially neutral. The factors currently in place are a much better reflection of current market circumstances.