Pension Protection Fund (PPF): What Happens If Your Employer Goes Bust

What Is the Pension Protection Fund?

The Pension Protection Fund (PPF) is a statutory body established by the Pensions Act 2004 to protect members of eligible defined benefit (DB) pension schemes in the UK. If your employer becomes insolvent and your pension scheme does not have enough money to pay at least PPF levels of compensation, the PPF steps in to pay your pension.

The PPF is funded by a levy charged to all eligible DB pension schemes, investment returns on its own fund, and assets transferred from schemes that enter the PPF. It does not use taxpayer money.

Which Schemes Does the PPF Cover?

The PPF covers most private sector DB and hybrid pension schemes. However, it does not cover:

• Defined contribution (DC) pensions — these are not eligible because benefits depend on the investment pot, not a promise from the employer
• Public sector pension schemes — these are backed by the government and do not need PPF protection (including NHS, Teachers', Civil Service, LGPS, and armed forces pensions)
• Schemes that were already winding up before 6 April 2005 — some of these are covered by the older Financial Assistance Scheme (FAS) instead
• Unfunded employer pension promises — informal pension arrangements without a separate trust fund

How the PPF Assessment Process Works

When an employer becomes insolvent (administration, liquidation, or a qualifying insolvency event), the pension scheme enters a PPF assessment period. This is how the process works:

Step 1: Insolvency Event

The employer enters an insolvency process. The insolvency practitioner notifies the PPF and the scheme trustees.

Step 2: Assessment Period Begins

The PPF takes control of the assessment process. The scheme trustees continue to administer the scheme, but under PPF rules. Members receive interim payments (based on PPF compensation levels) during this period.

Step 3: Scheme Valuation

The scheme actuary carries out a valuation to determine whether the scheme has enough assets to pay benefits at or above PPF compensation levels (known as the section 143 valuation).

Step 4: Outcome

The assessment period typically lasts 12–24 months, though complex cases can take longer.

PPF Compensation: What Would You Receive?

PPF compensation depends on your status at the date your employer became insolvent:

For detailed figures on the compensation cap and how it is calculated, see our guide on PPF compensation levels.

PPF Pension Increases

Once you are in the PPF, your compensation receives annual increases, but these may be less generous than your original scheme provided:

• Pension accrued from 6 April 1997 onwards — increased annually in line with CPI, capped at 2.5%
• Pension accrued before 6 April 1997 — no annual increases from the PPF

This means that if your original scheme provided increases on all your pension (including pre-1997 service) or increases above 2.5%, you would receive less generous inflation protection under the PPF.

Can You Transfer Out During a PPF Assessment?

No. Once a scheme enters a PPF assessment period, all transfers out are frozen. You cannot request or receive a cash equivalent transfer value (CETV) during the assessment. This is an important consideration: if you are concerned about PPF cap risk, you need to act before the employer becomes insolvent, not after.

After the scheme enters the PPF, you may be able to transfer your PPF compensation to another arrangement, but the transfer value will be based on the (reduced) PPF compensation level, not your full original scheme benefits.

How the PPF Is Funded

The PPF is funded through three main sources:

1. The PPF levy — an annual charge paid by all eligible DB schemes. The levy has two components: a scheme-based levy (related to the scheme's funding level and size) and a risk-based levy (related to the employer's insolvency risk)
2. Investment returns — the PPF invests its fund across a diversified portfolio of assets
3. Assets from schemes that enter the PPF — when a scheme transfers to the PPF, its assets are added to the PPF's fund

Is the PPF Itself Financially Secure?

Yes. The PPF publishes an annual report showing its funding position. As of its most recent report, the PPF has a substantial funding surplus — meaning its assets significantly exceed its estimated future liabilities. The PPF's long-term funding strategy aims to become self-sufficient, reducing reliance on the levy over time.

The PPF is also protected by its ability to adjust the levy: if claims increase, the levy on remaining schemes can be increased to maintain the fund's health.

What If Your Employer Is Struggling but Not Yet Insolvent?

If your employer is experiencing financial difficulties but has not yet entered formal insolvency, your pension scheme is not yet in a PPF assessment period. During this stage:

• Your full scheme benefits remain in place
• You can still request and receive a CETV
• The Pensions Regulator may be monitoring the situation and engaging with the employer
• The scheme trustees should be taking steps to protect members' interests

This is often the window during which members who are concerned about PPF cap risk take advice about whether a transfer might be appropriate.

PPF and Divorce

PPF compensation can be subject to pension sharing orders on divorce, just like normal DB pension benefits. If you are going through a divorce and either party has a pension in the PPF (or at risk of entering the PPF), specialist legal and financial advice is essential.

Next Steps

If your employer is financially healthy, the PPF is simply a safety net you are unlikely to need. If you have concerns about your employer's financial stability, check your scheme's latest funding statement and consider whether your pension would exceed the PPF compensation cap. For personalised advice, speak to an FCA-regulated pension adviser.

For further reading, see our guides on PPF compensation levels, can your DB pension be reduced, and DB scheme funding.