Pension funds and employer insolvency
Q : My employer has been declared bankrupt, and I am worried about my pension scheme. Is it safe?
A: Sadly in the current economic climate there are a number of people, growing by the day, that have similar concerns to yours.
It can be a stressful time in any event to lose a job, and having the added worry of your future financial security hanging in the balance can only cause greater concern and worry.
The safety of your pension will depend upon the type of scheme that your employer was running. If your employer was running a Defined Contribution scheme then your pension pot should be safe.
A Defined Contribution scheme is one where you and your employer made contributions into, and in essence, you had an individual pot of money earmarked for your retirement.
Even though this was a company scheme, no-one can touch or interfere with your fund. The fund is ultimately controlled by scheme trustees who have to act on your behalf and have your interests as a key objective.
Similarly if your employer was operating a Group Personal Pension Plan or Stakeholder arrangement then your pension will be safe.
These arrangements are similar to those just described, the key difference here however is that you control your pot of money and it is completely independent from your employer or any trustees associated with your employer.
Both the Defined Contribution Scheme and Personal Pension Plans will ultimately be protected by the Investors Compensation Scheme which is there to ensure that any investment is protected if the insurance company the funds are invested with becomes insolvent. If you were a member of your employer’s Defined Benefit Scheme then the extent to which your pension is safe is slightly less clear.
A Defined Benefit Scheme is more commonly known as a Final Salary arrangement and in this instance, rather than having a specific fund, your pension is paid on the basis of your service and salary with your employer.
You therefore do not have an individual pot of money that is earmarked for you, rather the fund is held collectively for the benefit of all employees.
Again such schemes have to have independent trustees who are there to protect the interests of all the scheme members, but the problem arises if the employer is declared bankrupt and the scheme is under-funded i.e. does not have sufficient assets to meet all the pension liabilities. Under these circumstances your pension may be protected by the Pension Protection Fund (PPF).
To be eligible for compensation under this scheme, the pension fund must meet a number of criteria.
These include the fact that it is unlikely that the scheme will be rescued and that there are insufficient assets in the scheme to secure benefits in the event of the scheme being wound up.
If the scheme is covered under the PPF, then if you have reached the pension scheme’s normal retirement age, it is likely that you will receive the same level of benefit that you would have received at the point your employer went into liquidation.
If you have not reached retirement age, then the level you will be compensated at will be broadly 90% of what you would have received from your employer.
As with most compensation schemes there is a cap on the amount you would be entitled to receive.
This amount is reviewed each year and is currently just in excess of £30,000.
If your pension falls under the PPF scheme then increases in future payments for members probably won’t be as much as they would have been under the terms of the scheme rules.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact firstname.lastname@example.org or (028) 9022 1010.