DECEMBER 1ST, 2006

The Pension Protection Fund (PPF) has made its first payments to pensioners whose schemes have gone bust.

The payments come 19 months after the PPF started taking on responsibility for insolvent pension schemes.

It is now giving pensions to 46 members of three schemes: in Girvan in Ayrshire, Padiham in Lancashire and Aylesbury in Buckinghamshire.

The PPF is currently dealing with 136 other schemes, which may become its full responsibility in due course.

Safety net

The PPF was set up in 2005 to provide a safety net for members of insolvent pension schemes.

Within certain limits, it promises to pay the full pensions of staff who have already retired and 90% of the pensions of those yet to retire.

Pension Protection Fund Chairman Lawrence Churchill said the payments were an important milestone.

"The first compensation payments being made directly from the PPF complete the final phase in the PPF's development," he said.

"We were set up to pay compensation and now we are doing so.

"From here on in, there will be a continuous flow of schemes completing their assessment period and their pensioners will feel reassured that their income every month comes from a known, trusted and stable source," added Mr Churchill.

Insolvent schemes

The three schemes whose members are the first to be taken on were also some of the first to approach the PPF in 2005.

They are the pension schemes of:

The Chilton textile firm from Girvan, with 220 members, of whom 31 are pensioners

The Perseverance Mills textile firm from Padiham, with 37 members (9 pensioners)

The Hamilton Machinery Sales plastics firm from Aylesbury, with 18 members (6 pensioners)

The deficits at the schemes ranged from £0.5m to £2.4m, which for small schemes meant they were substantially underfunded.

Partha Dasgupta, the chief executive of the PPF, said they were typical of the schemes he had dealt with so far.

"The majority of schemes by far are ones of companies that most people have never heard of, quite small and medium-sized enterprises."

The PPF expects that by the end of the current financial year, it will have absorbed 10 schemes.

It is inevitable that this number will expand steadily as the PPF works its way through the list of schemes that have already applied to be bailed out.

That means there are already more than 90,000 people under its umbrella.

As more pension schemes apply for rescue when employers go under, it is likely that the PPF will become one of the country's biggest pension schemes in the course of the next decade.

The holding pen

When a company goes bust, leaving a pension scheme with a deficit, the company administrators or scheme trustees can apply to the PPF for the scheme to be bailed out.

However, payments from the PPF itself do not start immediately.

The scheme will go through a year-long assessment - called being in the "holding pen" - during which the pension scheme continues to be operated by its trustees out of its existing funds.

But once the assessment period is over - and the PPF is certain the scheme is insolvent enough to qualify for a rescue - the PPF absorbs its assets and takes on direct responsibility for paying the pensions in the future.

"The ages range from 27 to 82, so some people are just getting a continuation of payment, other people may not get a payment from us for 30 or 40 years because they are still working," said Mr Dasgupta of the three schemes for which he takes responsibility today.

To make up the difference between the value of the funds being taken on and the assets actually needed, the PPF imposes an annual levy on solvent pension schemes and then invests the money.

However, the PPF's first annual report, published earlier this month, revealed that in its first two years of operation, it has deliberately chosen to raise less than it needs to top up its fund fully.

In effect, it has started life with a deficit of its own, but one which it expects to eradicate over time.