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PPF compensation and levy — how the safety net works

The Pension Protection Fund (PPF) is the statutory safety net for members of eligible UK defined benefit schemes whose sponsoring employer becomes insolvent. Its Board is established by section 107 of the Pensions Act 2004 “to provide compensation for members of certain occupational pension schemes which are under-funded at a certain level and whose sponsoring employer has become insolvent” ^leg. The framework rests on Schedule 7 to the Pensions Act 2004, which sets out who gets compensation and how it is calculated, implemented and repeatedly amended by statutory instruments. The PPF is funded by a levy on the very schemes it protects, and it recovers value from insolvent employers as a creditor. This article explains how compensation is calculated, how it differs from full scheme entitlement, how the levy is set, and how the Board’s rights are protected in insolvency.

What the PPF pays — compensation, not full benefits

PPF compensation is deliberately less generous than full scheme entitlement in several respects, defined member-class by member-class in Schedule 7. The amount due to “individual members is determined in accordance with Schedule 7 to the 2004 Act and regulations made under it, including the Pension Protection Fund (Compensation) Regulations 2005 (S.I. 2005/670)” ^leg. Schedule 7 distinguishes, among others, pensioners already in payment at the assessment date, active members and deferred members above or below normal pension age, and survivors — each with its own compensation paragraph ^leg.

The framework handles several awkward benefit shapes. Step-down (or “bridging”) pensions — where the scheme rules would have reduced the annual rate at a future “scheme decrease date”, such as on reaching State Pension age — are split for compensation purposes into a “basic element” (the portion payable for life) and a “bridging element” (the portion payable only until the decrease date), and the two are treated as separate pensions; this was introduced for assessment periods beginning on or after 24 February 2018 by new regulations 28 and 29 of the 2005 Compensation Regulations ^leg. Where the value of a member’s money-purchase benefits is small, the Board can discharge them by lump sum; that threshold was raised from £2,000 to £10,000 with effect from 6 April 2017 ^leg. Survivor rules have also been eased: from 6 April 2023, a dependent child can keep receiving compensation if they start a new qualifying education course before age 23, removing the previous requirement to begin it “within one year of leaving the previous course” ^leg.

How pensionable service itself is counted under paragraph 36 of Schedule 7 was litigated in Anthony Beaton v The Board of the Pension Protection Fund [2017] EWHC 2623, which required a calculation approach the PPF had not been applying. Section 126 of the Pension Schemes Act 2021 (commenced 31 May 2021) remedied its consequences by treating the corrective 2018 amendments to the Compensation Regulations “as if those amendments always had effect” — i.e. retrospectively to the Fund’s 2005 inception ^leg.

The compensation cap — rise, long-service uplift, and abolition

For most of the PPF’s history a monetary compensation cap limited what members below normal pension age could receive (it did not apply to survivor or ill-health pensions). The cap lived in paragraph 26 of Schedule 7, was indexed to earnings and was historically reset each year in the levy ceiling order — for example raised to £37,420.42 from 1 April 2016 ^leg.

The Pensions Act 2014 (sections 50–51 and Schedule 20) softened the cap for long-serving members, introducing from 6 April 2017 an increased cap for people with 20 or more years’ pensionable service ^leg. Supporting regulations clarified the aggregation rules where a member receives compensation in successive tranches or had taken earlier lump sums — benefits are added together only where they are all attributable to the member’s pensionable service, or all attributable to a pension credit from divorce or dissolution — with retrospective effect to 6 April 2005 under section 51(8) of the 2014 Act ^leg. A companion transitional order extended the long-service uplift to compensation already shared on divorce under the Pensions Act 2008 ^leg.

The cap was then abolished altogether for assessment dates on or after 1 January 2024. The Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023 omitted paragraphs 26, 26A and 27 of Schedule 7 — “which impose a cap on the level of compensation payable” — and stripped out the related Pensions Act 2014 long-service-cap machinery ^leg. Because the cap previously sat in the levy ceiling order, that order no longer carries a compensation-cap article: the 2026 order sets only the earnings percentage and the ceiling figure ^leg.

Why the cap was unlawful — age discrimination

The cap was not abolished as a policy choice; it was struck down. PPF compensation has two tiers: members at or above normal pension age (NPA) when the scheme enters assessment receive 100%, uncapped, while members below NPA receive 90%, subject to the cap ^DWP. Because the cap therefore bit only on younger members, it was held to be direct age discrimination. The High Court so found in Hughes and others v The Board of the Pension Protection Fund [2020] EWHC 1598 (Admin) (Lewis J), holding that denying members below NPA the full value of their benefits “amounts to unlawful age discrimination”. On 19 July 2021 the Court of Appeal upheld that finding in Secretary of State for Work and Pensions v Hughes [2021] EWCA Civ 1093 (Asplin, Green and Elisabeth Laing LJJ): the appeal against “the judge’s conclusion that the provisions in the Act enacting the cap are unlawful” was not allowed, though the PPF succeeded on a separate point about how the Hampshire 50% value is measured ^case.

For high earners the capped 90% rate could fall below half of the accrued benefit — DWP’s own analysis found that at the 2016/17 cap of £37,420.42 (so 90% = £33,678.38), a member on a 40/60ths accrual with a salary of roughly £101,000 or more would receive PPF compensation worth less than 50% of their accrued rights ^DWP. That collides with the separate EU-law minimum below.

The 50% floor — the Equal Treatment / Safeway legacy

The 2023 abolition came hand-in-hand with a new minimum. The same regulations were made under the Retained EU Law (Revocation and Reform) Act 2023 to codify the domestic effect of Article 8 of EU Insolvency Directive 2008/94/EC. Two CJEU rulings set that floor: C-17/17 Hampshire v Board of the Pension Protection Fund [2019] ICR 327, which held that “every former employee should receive no less than 50% of the value of their accrued old age benefits”, and the December 2019 Bauer judgment, which confirmed Article 8 “does not require a full guarantee” — 50% is the floor, not 100%, with an added safeguard against falling below the poverty threshold ^DWP. The abolition regulations cite Hampshire and the domestic Hughes decision directly ^leg. A new paragraph 22A of Schedule 7 provides that, for assessment dates on or after 1 January 2024, where the value of a person’s compensation would otherwise be “less than 50% of the value of the benefits which have accrued to or in respect of” them under the scheme, it must be adjusted upward — under Board guidance — so that its value reaches 50% of that benefits value ^leg. The 50% floor and the removal of the cap together mark the most significant re-shaping of PPF compensation since the Fund’s creation, and they sit alongside the EU-law equal-treatment principles familiar from the GMP / Safeway strand of pensions litigation.

The pension protection levy and the levy ceiling

The PPF is funded by an annual pension protection levy on eligible schemes, made up of a risk-based element (reflecting each scheme’s underfunding and the insolvency risk of its employer) and a scheme-based element. Section 175 of the 2004 Act “requires that the Board impose pension protection levies for each financial year”, and section 177(2) provides that the total “must not exceed the levy ceiling for that financial year” ^leg. The ceiling is a statutory maximum, not a target — the Board may, and does, charge well below it.

Under section 178(3)(a), the ceiling must rise in line with any increase in the general level of earnings in Great Britain over the review period, and the Secretary of State resets it each year by order ^leg. The figure has climbed steadily: it stood at £981,724,264 for 2016/17 (a 3.6% earnings uplift) ^leg, £1,403,184,443.44 for 2025/26, and £1,473,343,665.61 for 2026/27 — the latter reflecting a 5% earnings increase over the year to 31 July 2025 ^leg. The gap to the actual charge is stark: the levy estimate for 2025/26 was just £45m — the Fund’s lowest ever, around 3% of the ceiling — against PPF reserves of about £13.2bn on roughly 150% funding ^Hans.

In practice the gap between ceiling and charge is now enormous. Following its levy consultation, the PPF confirmed in February 2026 that it would not charge conventional schemes a levy at all for 2026/27 — a zero levy ^PPF, reflecting the strong aggregate funding position of the eligible DB universe (the population mapped each year by the Purple Book; see the The Purple Book (series) series) and the PPF’s own financial resilience. That a multi-billion-pound statutory ceiling can coexist with a zero actual charge underlines that the ceiling caps, rather than sets, the levy.

The PPF’s own Annual Report and Accounts 2025/26 (year to 31 March 2026) put concrete figures on that resilience: £31.5bn of assets under management, £15.1bn of future-claims-and-risk reserves against £16.4bn of current claims liabilities, £1.2bn of benefits paid to members in the year, and a 7.1% return on growth assets ^PPF. The Fund characterised the year as one of strong delivery for members and continued financial resilience ^PPF. Those reserves (up from the ~£13.2bn cited above for the prior levy year) are the buffer that lets the Board run a zero levy while still standing behind the eligible universe — though they now carry the added pre-1997-indexation and terminal-ill-health liabilities the Pension Schemes Act 2026 introduces (below). (PPF own-copyright — headline statistics recorded with attribution; the full report is on the PPF site.)

The zero levy had been constrained by the old rule that, once the levy was cut, the Board’s power to raise it again was tightly limited — a deterrent to cutting it in the first place. Section 123 of the Pension Schemes Act 2026, the first provision of the Act to be commenced (in force 29 June 2026), removes that trap: it lets the Board reduce the levy to zero or a low amount when it is not needed and raise it again within a reasonable time, subject to a safeguard capping any annual increase at the previous year’s levy plus 25% of the previous year’s levy ceiling ^leg. This gives the zero levy a durable statutory footing. See Pension Schemes Act 2026.

The Board’s rights as a creditor in insolvency

Because the PPF stands behind the scheme, it has an interest in maximising recoveries from a failing employer, and modern restructuring law gives the Board — not the trustees — control of certain creditor rights. The Corporate Insolvency and Governance Act 2020 introduced the company moratorium (Part A1 of the Insolvency Act 1986) and the restructuring plan (Part 26A of the Companies Act 2006), and accompanying regulations reallocated the relevant creditor rights to the Board where the employer of an eligible scheme is involved ^leg.

In a moratorium, the creditor-consent right under section A12 and the right to challenge directors’ actions under section A44(4)(c) “are instead to be exercised by the Board to the exclusion of the trustees or managers of the scheme”. Where a Part 26A restructuring plan is proposed, the Board may exercise the trustees’ creditor rights in addition to the trustees, but the right to vote at a court-summoned meeting on whether to approve the compromise or arrangement passes to the Board alone. In every case the Board “must consult the trustees or managers of the scheme” before exercising those rights ^leg. This is what stops a distressed sponsor from using a restructuring tool to dilute the pension scheme’s claim without the safety net having a seat at the table — a recurring tension in endgame and covenant planning and in the choice between run-on, buyout and superfund routes.

When an eligible employer’s insolvency does crystallise, the scheme enters a PPF assessment period — the window in which the Board checks whether the scheme can afford to secure benefits above PPF-compensation level or must transfer into the Fund, and during which compensation-level (rather than full-scheme) rules already bite on any benefits coming into payment. A current worked example is the Harvey Nichols Pension Scheme, which in August 2026 the PPF publicly confirmed was in a PPF assessment period, reassuring members that it stands behind their pension and directing PPF-assessment queries to its member line ^PPF. (PPF own-copyright — operational fact only; the notice carries no figures, funding detail or member numbers. See the PPF page for detail.)

On the horizon — pre-1997 indexation and the Pension Schemes Act

One long-standing gap is that pre-1997 service in the PPF (and in the linked Financial Assistance Scheme) has not attracted statutory inflation increases. The PPF welcomed a government Budget 2025 announcement of an intention “to change the law to enable the payment of inflation increases on pre-97 pensions to PPF and Financial Assistance Scheme (FAS) members” ^PPF. The Pension Schemes Act, which “includes several measures relating to the Pension Protection Fund and Financial Assistance Scheme”, became law in April 2026 ^PPF — and was indeed the vehicle: a government new clause at Commons Report added prospective pre-1997 indexation (CPI capped at 2.5%) for PPF and FAS members whose former schemes provided for increases, the Act’s parliamentary record costing it at roughly £2bn of added PPF liability (leaving reserves around £11bn, still ~150% funded) and £400m–£700m for the FAS over its lifetime ^HansHans. The debates also recorded why pre-1997 benefits were the priority: high inflation in 2022–24 had cut their real value by about 40% (pre-1997 attracts no PPF increase at all), against a ~20% loss on capped post-1997 compensation ^Hans. The PPF also published its finalised 2026/27 levy rules confirming the zero charge ^PPF.

These changes are now moving from statute into delivery: on 6 July 2026 the PPF said it had begun contacting members affected by the changes to PPF compensation and FAS assistance directly (by email or post), stressing that affected members need take no action themselves — the pre-1997-indexation cohort being notified first ^PPF. (PPF own-copyright — operational-milestone fact only; see the PPF page for detail.)

Pre-1997 indexation is not the only PPF/FAS change the Act carries. The PPF has also flagged that the Pension Schemes Act 2026 has changed how terminal ill-health payments work for both PPF and FAS members — a further of the Act’s “several measures relating to the Pension Protection Fund and Financial Assistance Scheme” ^PPFPPF. (PPF own-copyright — headline fact only; see the PPF page for the detail.) See Pension Schemes Act 2026.

More fundamentally, PPF compensation levels are themselves back under review. With the Fund holding “reserves of over £12 billion”, the government has said it “will be consulting in the coming months on levy changes, and PPF compensation levels” ^DWP. At the same time it rejected an opt-in 100% PPF underpin for surplus-extracting schemes — “due to the high cost and moral hazard concerns” — and confirmed it would not legislate for a PPF-run public-sector consolidator in the current Bill ^DWP. So the direction of travel is more generous compensation (the cap gone, a 50% floor in, pre-97 indexation coming, levels under review) funded from a strong reserve, but not a full 100% guarantee. This connects to the surplus-release debate and the endgame route choice, where the strength of the PPF backstop shapes how much risk a scheme can responsibly run.

Related

The Purple Book 2025 · The Purple Book (series) · DB endgame — run-on, superfunds, buyout and risk transfer · DB endgame routes compared — run-on vs buyout vs superfund · DB scheme funding and TPR's Funding Code