The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2012

EXPLANATORY NOTE

(This note is not part of the Order)

This Order specifies the levy ceiling (articles 2 and 3) and the amount of the compensation cap (article 4) for use in relation to the Pension Protection Fund in the financial year beginning on 1st April 2012.

The Board of the Pension Protection Fund (“the Board”) is established by section 107 of the Pensions Act 2004 (c.35) (“the Act”) to provide compensation for members of certain occupational pension schemes which are underfunded at a certain level and whose sponsoring employer has become insolvent.

Section 175 of the Act requires that the Board must impose pension protection levies for each financial year. Section 177(2) provides that the amount of the levies for a financial year must not exceed the levy ceiling for that financial year. The Occupational Pension Schemes (Levy Ceiling) Order 2011 (S.I. 2011/841) (“the 2011/2012 Order”) specified that the levy ceiling for the financial year beginning on 1st April 2011 is £892,092,092. Section 178(3)(a) of the Act provides that the levy ceiling must increase in line with any increase in the general level of earnings obtaining in Great Britain.

Article 2 of this Order specifies that the increase in the general level of earnings for the period from 1st August 2010 to 31st July 2011 is 3%. Accordingly, article 3 of this Order specifies that the levy ceiling for the financial year beginning on 1st April 2012 is £918,854,855.

The compensation cap is used by the Board to determine the amount of compensation payable to a person who is under normal pension age on the assessment date (as described in paragraphs 2 and 34 of Schedule 7 to the Act) and whose compensation is not derived from a survivor’s pension or a pension payable on the grounds of ill health. Paragraph 26 of Schedule 7 to the Act can restrict the amount of compensation payable. When it does so, the Board uses the compensation cap to determine the amount of compensation payable.

Article 4 of this Order increases the amount of the compensation cap from 1st April 2012 to reflect a higher general level of earnings.

Article 5 of, and the Schedule to, this Order revokes the Orders which made equivalent provisions to this Order for the last financial year:

• the Occupational Pension Schemes (Levy Ceiling – Earnings Percentage Increase) Order 2011 (S.I. 2011/169) (“the Increase Order”),

• the Pension Protection Fund (Pension Compensation Cap) Order 2011 (S.I. 2011/840), and

• the 2011/2012 Order.

They also revoke all the predecessors to the Increase Order, which no longer have any effect.

This Order amends an existing regulatory regime by a pre-determined formula and the associated administrative costs or savings for the private sector and civil society organisations are negligible. A full Impact Assessment is not necessary for such an Order.