Is my pension safe if my employer goes into administration?
The consequences vary depending on if you are a part of a money purchase scheme or a salary related scheme.
A money purchase scheme (also known as a defined contribution pension scheme) is one where the money put aside for your pension is split into contributions, which have been agreed by yourself and the employer. This compares to a salary related scheme (also known as a defined benefit scheme) which is when your pension is paid in relation to the salary you will earn when you retire. The latter of the two is less common nowadays, due to the high risk and cost upon the employer.
If you were a part of a salary related scheme, the value of the pension would be defined by your length of service, age at retirement and the final salary level, not the total contribution over the years.
What about administration?
If you are a part of a money purchase scheme, your pension pot will only be affected if the employer has failed to pay their pre-agreed contributions. If you are a part of the salary related scheme and if the pension fund cannot meet its current and future liabilities, the new pension protection fund helps and ensures pensions can still be paid.
What is the Pension Protection Fund (PPF)?
In 2005, this was made to cover compensation to eligible members of benefit pension schemes when insolvency events happen. It came about after eligible employees lost their pension, through no fault of their own, when their employers went bust.
Once the company’s liquidation has been announced, with regards to the pension scheme, the following happens:
- A 4-week long assessment begins of the benefit scheme, to determine your eligibility
- If the scheme is deemed eligible, it takes up to two years to go through the next process of deciding how much compensation will be paid to members
- From the start date of the assessment period, those who have retired already will be given their full pension. For employees not at retirement age, they will receive 90% of benefits depending on the maximum levels the fund offers.
As the PPF is a non-government funded scheme, there are maximum levels of compensation members are entitled to. For those 60 years old, it is capped at £31,439.18. For those aged 65, the limit is £36,401.19. It should be noted that the value of pensions increases with inflation.
Before you retire, an annual forecast of compensation payments will be given. Additional to this, the PPF will contact you six months before you are going to retire, to inform you how to get your compensation pension. Once the assessment phase has begun, you must stay in your current pension scheme and not transfer any money over to a new one, unless you have requested, and it has been accepted beforehand.
What about if I am in a Defined Contribution/Money Purchase scheme?
If you are a part of the money purchase benefit scheme, and your employer goes into liquidation, the scheme itself is not affected as it is independent and not linked to the employer’s situation. The contributions are put into a portfolio of investments, so the final amount of your pension is dependent on how well these perform. Therefore, you will only lose out on the pension contributions – those which were pre-agreed and are now unable to be paid. If you have unpaid employer contributions, you can claim from the National insurance Fund.
Alternatively, if the pension provider goes bust, you can claim compensation from the Financial Services Compensation Scheme.