How Financial Assistance Scheme (FAS) Operates for Pensioners?

To look after the interest of employees who had an insolvent employer, the UK came up with the Financial Assistance Scheme (FAS). It meant the state would bear the significant losses to defined-benefit pensions if any employer were to declare insolvency between 1 January 1997 and 5 April 2004. Announced on 14 May 2004 and introduced in July 2005, the plan extended to cover more people and was subsequently designed to offer increased benefits. Some more extensions were rolled out in December 2007 and an equality assessment was done for those changes.

Established by the Pensions Act in 2004 through Board of the Pension Protection Fund (PPF), FAS is funded by an estimated £1.9B of taxation and scheme assets. It is accountable to parliament through Secretary of State for Work and Pensions. Financially separate from PPF, FAS is funded by a levy on direct benefit schemes. FAS can be utilised for ill health benefits and its indexation ceases at retirement.

Also Read : Pension Protection Fund – FAQ – 10 Points to Know

How FAS operates?

• The top-up payment system method Through this member benefits are secured through an annuity where schemes will wind-up generally. In this method, transfer payment or winding-up of a lump sum is initiated with a member’s share of remaining scheme assets. In case payments are less than 90% of a member’s accrued pension (cap if in place) the FAS makes a top-up payment to bring overall payments up to 90% of expected pension. The FAS payments in this case are generally made from a member’s normal retirement age onwards. Further, FAS payments can also be made to eligible survivors & surviving dependants of qualifying members if the situation arises.
• The replacement payment system method Schemes qualifying to be covered by the FAS and are yet to complete windup need to transfer their assets to government rather than utilising them to purchase annuities. As the assets are transferred to government, the FAS will take sole responsibility of making payments to members rather than a payment from annuity getting supplemented by ‘top-up’ assistance payment. Factors impacting FAS

  Impact of the way Financial Assistance Scheme (FAS) assistance is revalued and indexed with factors such as matters of employment, occupational pension schemes. The Financial Assistance Scheme (FAS) is can’t discriminate on grounds of:

  • Disability
  • Gender and Transgender
  • Race
  • Age

Disability

FAS is inclusive of a provision which allows payments to be made early in cases of ailments or terminal illness. It means such individuals will receive indexation on their entitlement as opposed to revaluation prior to normal retirement age.

Gender and transgender equality

Public authorities need to actively address the individual needs of women and men under the Gender Equality clause of FAS. FAS gives assistance to those who lost out on their benefits as the scheme applied only to members of defined benefit occupational pension schemes. Here FAS seeks to remove any inequality that may come about due to a gender of individuals. It seeks that employers treat all employees equally.

Race equality

Entitlement to FAS takes into considerations all variables related to race equality. Here FAS considers workforce demographic of the qualifying scheme’s sponsoring employer at the time the pension accruals were built-up.

Age equality

FAS provides an income in retirement and is therefore governed by age-based rules concerning when assistance may be accessed.

Members who have lost some or all of their occupational pensions generally due to employer insolvency are helped via Financial Assistance Scheme (FAS). In essence, the rules are generally meant to reflect minimum statutory requirements required for revaluation and indexation in occupational pension schemes.

In some situations, FAS payments are evaluated by reference to the pension accrued by members before the winding up of schemes. Accrued pensions are generally re-valued till the time payments begin to take account of inflation and its impact. Once in payment, indexation is applied in respect of pension accruing from April 1997 to again to take into any inflation which may come about. However, there are also caps on amount of revaluation and indexation used in statutory minima for occupational pensions.

On 8 July 2010, the government proposed a different inflation measure – the Consumer Prices Index (CPI). This was to be a basis for indexation and revaluation of assistance given through Financial Assistance Scheme (FAS). CPI was also considered as a part of a wider decision to allow Government’s general measure of inflation impacting state pensions, public sector pensions , and social security benefits. All required for statutory minimum revaluation, indexation of private sector pensions and pension compensation given by a Pension Protection Fund.

The government treats CPI as an adequate measure of price change as:

• Any measure used by Bank of England’s inflationary target seeks to achieve consistency
• It is the most high profile measure of inflation
• Methodology taking account of substitution behavior is a better reflection of actual inflation experiences
• Not relevant to most benefit and pension recipients factors like mortgage interest payments to be excluded

Here the government believed it would be inappropriate to use a different measure for the FAS than a legislation governing pension schemes themselves. It meant that:

Accrued pensions were to be re-valued through Retail Prices Index for periods before 31 March 2011 and by reference to CPI after that date. In this regards, relevant caps to revaluation increases will continue to apply as they do under current rules:

• FAS cap to be increased by reference to CPI from April 2011 and subsequent years
• Changes to indexation of relevant FAS payments to be undertaken in line with CPI. The changes came into force on 31 December 2011

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.