8. Leaving PPF assessment

8. Leaving PPF assessment

Q8-1. How have we got here?
Before 2009, your pension was provided by the Plan in accordance with its rules. The cost of paying Plan pensions were covered in part by your contributions, but mainly by Nortel Networks UK (NNUK) as the sponsoring employer.
When NNUK went into administration in January 2009, all funding ceased and the Plan entered an assessment period with the Pension Protection Fund (PPF). During this period the Plan has been required to pay benefits in line with the rules of the PPF, which for most members means a lower benefit than the Plan.
In 2009, we began a process to ensure members of the Plan recovered as much as possible from their lost Plan benefits. Our recovery activities over the past nine years have resulted in us increasing our funds and we are now able to offer our members pension benefits which are collectively more valuable than those in the PPF. However, we did not recover enough funds to provide members with full Plan benefits.
This means that we are now able to start the process for exiting the PPF assessment period and securing your pensions externally.

Q8-2. Why are we leaving the PPF assessment?
Pension schemes which are in assessment or actually enter the PPF are only able to pay pensions in line with the rules of the PPF. Generally these PPF pensions are lower than the pensions our members had built up in the Plan. When we add recoveries to existing Plan assets, we expect to be able to provide most members with benefits which are better than the value of PPF benefits.

Q8-3. What is the difference between my PPF Pension Value, my Share of the Funds, and my Plan Pension Value?
These three terms are used to determine your entitlement in the Plan and the options you have with regards to your entitlement. They are calculated based on the expected cost of paying your annual pension until your death, and if applicable, any pension due to any eligible spouse/dependant after your death. The terms may be used in your future personalised statements.
  • Your PPF Pension Value is the amount it would cost to secure all of your future pension payments based on the rules of the PPF, including any eligible spouse’s/dependant’s pension, with an insurer.
  • Your Share of the Funds is your allocation of the Plan funds, which is at least equal to your PPF Pension Value. Please see question Q8-4 for an explanation of how this is calculated.
  • Your Plan Pension Value is the amount it would cost to secure all of your future pension payments based on your original Plan benefits before entering the PPF, including any eligible spouse’s/dependant’s pension, with an insurer.

Q8-4. How is my Share of the Funds calculated?
The calculation is carried out by the Scheme Actuary in accordance with legal requirements. The precise method is complex but broadly speaking:
All members will receive a Share of the Funds at least equal to their PPF Pension Value. Members for whom their Plan Pension Value would have been greater than this will receive additional funds based on a proportion of the shortfall. The proportion will be the same for all members and will be dependent on the total remaining funds in the Plan, after securing PPF level benefits for all members, compared with the total shortfall across all members.
As a simple example, if your PPF Pension Value was £100,000, and your Plan Pension Value was £120,000, you would have a shortfall in benefits of £20,000.
Now suppose after all members’ PPF benefits were secured there was £10 million remaining, and the total shortfall to insure all members’ full plan benefits was £100 million, the additional proportion for all members would be 10%.
You would then receive an additional £2,000 (which is equal to 10% of your shortfall of £20,000). This would be used to secure additional pension with our chosen insurance provider, or would be included in any other options that are available to you.

Q8-5. What is the difference between the increases the PPF pay on a pension in payment and the pension increases that will be provided for me (if I do not choose an alternative option)?
The table below shows the different increases payable by the PPF on a pension in payment, compared to the default pension increases that the Trustee will secure in order to meet statutory requirements. The increases payable depend on when you built up your pension.
If any of your pension relates to service in the Plan after 5 April 1997, in order to take account of the cost of paying for the default statutory pension increases, the initial amount of your pension may be less than you are currently being paid. However, you will also have the option to choose to give up your entitlement to future statutory pension increases and receive a higher initial pension that does not increase in payment.
Pension increases in payment
PPF pension increases Statutory pension increases
Service in the Plan before 6 April 1997 nil nil
Service after 5 April 1997 to 5 April 2005 in line with the annual increase in the Consumer Prices Index (CPI) capped at 2.5% a year in line with the annual increase in the Retail Prices Index (RPI), capped at 5% a year
Service after 5 April 2005 in line with the annual increase in the Consumer Prices Index (CPI) capped at 2.5% a year in line with the annual increase in the Retail Prices Index (RPI), capped at 2.5% a year

Q8-6. What is the difference between RPI and CPI?
Both RPI and CPI are measures of inflation i.e. how quickly the cost of goods and services are increasing each year.
Each measure looks at a different set of goods and services and applies a different calculation method to assess changes in their cost. A key difference is that RPI includes the cost of housing (e.g mortgage interest cost and council tax) whereas CPI does not. This means that RPI will usually be higher than CPI and hence RPI linked pensions will probably increase faster than CPI linked pensions. Please note that we are not offering an option for pension increases to be linked to CPI.

Q8-7. When do I have to make a decision about my pension options?
We will write to you in early 2018 to explain your options and, if applicable, provide personalised illustrations to help you to compare your options. You will then have three months to return the paperwork to indicate which option you choose.
Depending on which option you choose, you may have a further point in time where you can change your mind. We will confirm whether this is the case for each option when we write to you in early 2018.

Q8-8. If I am legally obliged to speak to an IFA why aren’t you paying for it?
Not all members will have to speak to an IFA, and in most cases, you do not have to take advice if you do not want to. This is only legally required for non-pensioners for whom their Plan Pension Value would have been over £30,000 and who wish to take a transfer option to another provider. The letters to be sent in early 2018 will confirm whether you are required to take financial advice.
However, as we only have a finite amount of money to pay benefits to our members, we want to make sure that this money is used fairly across all our members. Therefore, we made the decision that anyone wanting to exercise the options would need to cover the cost of their independent advice. But we wanted to ensure this service was readily available and have therefore facilitated this advice with a company of Financial Conduct Authority (FCA) registered financial advisers, called LEBC, to give you tailored financial advice or guidance as appropriate, at a significantly reduced price.
Of course, you can use your own IFA for advice or guidance but they will not have been specifically trained on the specifics of the Plan and members’ options.
Please note that financial advice or guidance, as appropriate, will be available from LEBC for eligible members in relation to the transfer option and, for members with post 1997 Plan service, in relation to the pension increase option.

Q8-9. What is the difference between impartial financial advice and impartial financial guidance? (Pensioners only)
As part of either process, LEBC (or your chosen advisor) will explain your options and consider your current situation and future plans to help you make a decision. However, if you purchase financial advice, LEBC will make a recommendation for you regarding your options.

Q8-10. Who is ‘our chosen insurance provider’?
As part of the process, the Trustee, having sought advice from their advisors, will choose the insurance provider for securing pension benefits based on a number of criteria. Pensions may be secured with more than one provider depending on the approach that best satisfies our requirements. The specific providers are not likely to be known until shortly before we exit the PPF assessment period.

Q8-11. Will I receive more from future recoveries?
Please check the ‘Latest News’ section of our homepage for information on recoveries received to date and expectations for future recoveries. The options pack to be sent in early 2018 will explain whether you are eligible to receive more from future recoveries.

Q8-12. Can I cash in my pension if I’m currently receiving my pension? (Pensioners only)
This is only an option for members who are in receipt of a pension with a Share of the Funds less than £18,000 (or £30,000 if you are already receiving a spouse’s/dependant’s pension). If this is an option available to you, then we will confirm when we write to you in early 2018.

Q8-13. Will I still be able to take a tax free cash lump sum when I retire? (Deferred members only)
Current legislation allows you to exchange some of your pension for a tax free cash lump sum when you retire. If you choose to take a deferred pension you would still have this option when you retire, subject to no changes in legislation.

Q8-14. Would my eligible spouse/dependant receive a pension on my death?
If you choose one of the pension options, and your benefits under the Plan provided a pension to your eligible spouse/dependant on your death, then a pension would be paid to your eligible spouse/dependant.
Please note that under the Plan Rules an eligible spouse/dependant pension is not payable in respect of any Q Scheme or EPB (Equivalent Pension Benefits) elements of your pension entitlement.
Further information on your spouse/dependant pensions will be provided with your options.

Q8-15. What happens if the value of the assets held by the Plan fall significantly?
Following advice, the Trustees have selected an investment strategy such that members’ benefits should be largely protected against adverse market conditions. For example, we do not invest in the stock market which typically fluctuates very frequently.
In the unlikely scenario that the value of Plan assets fall below the value of members’ pensions at their level in the PPF, all pensions would be maintained at their PPF level.

Q8-16. What happens if your chosen insurer becomes insolvent?
Insurers are required by law to hold a high level of assets in order to pay your benefits. If in the unlikely scenario our chosen provider becomes insolvent, your entire pension is protected by the Financial Services Compensation Scheme.

Q8-17. What are the benefits of taking my pension now versus waiting for this process to complete before taking my pension? (Deferred members only)
If you are not sure when to take your pension, it may be useful to contact LEBC after you receive your options pack. They will consider your personal circumstances and explain the different options that will be available to you (or will no longer be available to you), depending on when you decide to take your pension.

Q8-18. What are the ‘Pension Freedoms’ introduced in 2015?
The Government has transformed the pensions landscape over the last couple of years. Pension savers now have more control and flexibility over how defined contribution (DC) pension savings are accessed. Individuals can now access their DC savings at retirement by:
  • Keeping their money invested and taking it a bit at a time in retirement (called drawdown)
  • Taking it all as cash
  • Using it to buy a pension (by buying an annuity from an insurance company).
The full flexibility does not apply to your defined benefits in the Plan. However, if your Plan benefits are not yet in payment and you are under Normal Retirement Age, you could access the new flexibilities by transferring the value of your benefits to an approved DC pension scheme.
This means greater flexibility for members, but also greater responsibility on members to make sure they do not run out of money. Under these alternative options, up to 25% of a member’s pension savings may currently be paid tax free; the remainder is taxed in the same way as other income.

Q8-19. What is a GMP and what is happening to GMP benefits in the Plan?
If relevant, Guaranteed Minimum Pension (‘GMP’) is the part of your pension in the Plan (if any) which was earned as a result of you (or your late spouse) being contracted out of the State Earnings Related Pension Scheme (SERPS) before 6 April 1997 whilst a member of the Plan.
Specific statutory requirements set out when GMP must be paid and how it must be calculated. For example, GMP becomes payable from age 65 for males and age 60 for females and builds up at a different rate for men and women. Different rules apply to how GMP is increased before and after GMP payment age. These differences in the way that GMPs are calculated and paid to men and women can mean that a male and female member with identical service and pay history could receive different amounts of pension in payment.
As part of the process for determining your Share of the Funds, and if you have a GMP, we will carry out a check to determine whether your benefits earned after 17 May 19901 and before 6 April 1997 would have been more valuable if you had been of the opposite sex. If so, an allowance for this will be made when calculating your Share of the Funds.
To simplify the process for providing benefits and to provide more flexibility as to how your Share of the Funds can be applied, the Trustee also intends, as permitted by legislation, to convert members’ benefits so that they no longer include a specific GMP component. This conversion process, which would be carried out before any benefits are secured outside the Plan, will not affect the overall value of your benefits nor the calculation of your Share of the Funds (which will take account of the value of any applicable GMP equalisation adjustment that might be relevant to you).
1 This date has been chosen because the law allows benefits accrued before 17 May 1990 to be different for men and women.