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What happens to my pension if my company goes into liquidation.
Do I still have my pension when the company is insolvent.
We can barely turn on the T.V, read a newspaper of listen to the radio without hearing the dreaded word ‘recession.’ On top of hearing about recession we also hear about falling share prices and business closing and ceasing trading. This has a direct impact on your own individual pension schemes and can cause great concern.
Whilst the global credit crunch continues, it is even more important to plan for the future and to begin to contribute into a pension scheme to protect that future you want. Back in the 70’s and 80’s there were instances of pension funds ‘going missing’ you may recall the Robert Maxwell affair which was allegedly linked to missing pension funds. Times have moved on quite significantly since that time and better financial arrangements have been put into place to protect the customer from such incidents reoccurring.
Although we have moved on quite considerably, it is still possible for a pension scheme to run out of money, this will only occur if you have entered into a Final Salary scheme, it is not possible to run out of money if you have taken out a Money Purchase scheme. So what’s the difference, well:
Money purchase scheme
The contributions made by yourself and your employer are invested on your behalf by an insurance company, or qualified person. The amount of eventual pension you will get is unknown in advance as it depends on how well the investment has performed. In that sense, the scheme can only have a shortfall where there has been fraud or theft. In such circumstances, it may be possible to recover some of the money through the Pension Protection Fund.
Final salary (or 'defined-benefit') scheme
The amount you get is based on your salary and the number of years you've been in the scheme. All the money is put into one pension pot which provides benefits for all its retired members. Your scheme can run out of money if the amount it has to pay out now - or the amount it's promised to pay out in the future - is more than the total value of its investments. If this does happen there are mechanisms and safeguards in place to compensate members.
What if the company goes bankrupt?
Don’t worry, if your company becomes bankrupt or insolvent, you can be assured that your pension won’t be lost in as much as it's guaranteed by a government backed scheme. In the event of bankruptcy the amount accumulated in the pension fund cannot be used to pay debtors or the receivers. It may mean that the overall pension fund ends up less than predicted due to the company owing the pension fund money, if this happens you may be entitled to assistance through the Pension Protection Fund or the Financial Assistance Scheme.
If a shortfall in your company's pension fund is due to fraud or theft, it may be possible to recover some of the money through The Pension Protection Fund.'
It is extremely rare for a pension scheme to go bankrupt and with good financial advice, this risk becomes even less apparent. Your financial adviser will be able to ensure you receive the best advice possible and discuss any associated risks.
More . . . - added late feb ~10
What happens to my pension of my company goes bankrupt?
My pension and company insolvency
It's a unhappy thought. And everyone will understandably be putting their own interests first. Mayhem!
Quite often a business will go bust owing its employees a bundle of benefits, not just pension responsibilities but redundancy owed, half paid insurance premiums, payoffs and a bunch of other benefits too. And it'll take quite some sorting out. Have a look at the DirectGov site and the Information Commissioner for insolvency information
So, come on! - what does happen to my pension if the company I work for becomes insolvent or closes down for any reason?
Ok. First of all. The pension contributions you have been paying in will have been going into a pension fund, and managed by Pension Fund Trustees. It is unlikely that this money has been fraudulently spent by your directors, and this money cannot be used legally to prop up the company by paying off debts with it. It is separately protected. It is however, somewhat likely still to fall short of full coverage of all employees future pension liabilities. In candid summary the funds are usually managed pretty unimpressively by the Trustees and tend to not make much money, yet pay out lots of fees to investment advisers meanwhile.
If your company goes bust and does not have enough money in its pension fund to pay everyone out, it can apply to the government's Pension Protection Fund to make up the difference. However, there are lots of howevers . . .
The first however is that the pension fund you pay into must be eligible. Eligibility is determined on a load of criteria but mainly, if your pension fund is salary related, and bigger than 12 people, it is more likely to be eligible.
Secondly, it is still unlikely to meet your expectations of your pension payments as the allowance will be adjusted according to different criteria. e.g. if say the post office went bust with say a £5 or £6 billion shortfall in its fund, then the Government would step in,
firstly using the Pension Protection Fund (www.ppf.gov.uk) which was set up for this purpose, and if that fund didn't have enough money in it to be able to foot the bill then they would have to find the money from somewhere else. Here is a bit of information in pdf from from the ppf website. "If there is enough money, or other assets, to buy more than the PPF will pay, the scheme will not transfer to the PPF but will find an insurer willing to ‘buy out’ its liabilities and make payments to its members."
Third, the pension fund will need to have been wound up after the setting up of the PPF.
Fourth, and so on, it offers a maximum of approximately £30,000 per annum.
How much you'll get is partly covered here at the PPF website.
If you're not covered, there are other schemes like the FAS, the Financial Assistance Scheme, and others. More about the Financial Assistance Scheme here. (The Department for Work and Pensions.)
Get ready for some determined effort. This sort of situation can take a lot of time (years) to sort out, and if you're not careful can cost you alot of money in advice.
Get guidance and help straight away from the Pensions Advisory Service - www.pensionsadvisoryservice.org.uk
Contact the trustees of your pension. Ask the directors for their details or get them from your pension benefit statement and keep track of the status at all times.
Insolvency Service : Contact the Insolvency Service on 0845 602 9848 and email at Insolvency.EnquiryLine@insolvency.gsi.gov.uk
Talk also to your solicitor to get advice from your point of view though keep your costs down of course.
Write everything down in a diary, who you spoke to, when and what they said.
There is a good article on the DirectGov site that also summarises some of your options.
Is my company pension fund protected by the government Pension Protection Fund Scheme?
The Pension Protection Fund
"established to pay compensation to members of eligible defined benefit and hybrid pension schemes when there has been a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation."
Eligible defined benefit and hybrid pension schemes refers mainly to salary related and final salary schemes. If your pension is not salary related, or part of a government backed organisation the pension is unlikely to be covered by the scheme. Size isn't generally an issue - less than three members is a problem and less than 12 members under some other conditions will be a problem - details are in the entry rules. Most defined benefit occupational pension schemes and defined benefit elements of hybrid schemes are likely to be covered by the Pension Protection Fund.
Is my pension fund eligible for this protection?
An eligible fund is defined in section 126 of the Pensions Act 2004 and the Pension Protection Fund (Entry Rules) Regulations 2005. See this document Act
A summary is provided by the PPF website:
Eligibility
Qualifying Conditions
The Pensions Act 2004 sets out the conditions that must be met for the Pension Protection Fund to assume responsibility for a scheme.
In high level terms, in order for the Pension Protection Fund to assume responsibility for a scheme, the scheme must satisfy the following key criteria:
- a) the scheme must be a scheme which is eligible for the Pension Protection Fund;
- b) the scheme must not have commenced wind up before 6 April 2005;
- c) an insolvency event must have occurred in relation to the scheme's employer which is a qualifying insolvency event;
- d) there must be no chance that the scheme can be rescued; and
- e) there must be insufficient assets in the scheme to secure benefits on wind up that are at least equal to the compensation that the Pension Protection Fund would pay if it assumed responsibility for the scheme.
Where a qualifying insolvency event occurs in relation to the employer of an eligible scheme then an assessment period will automatically begin.
However, some schemes will be exempt from the Pension Protection Fund. Regulations will set out those schemes which are exempt from the Pension Protection Fund. This list is not exhaustive, however it is likely that the following pension schemes would be exempt:
- unfunded public service schemes;
- public sector schemes providing pensions to local government employees;
- schemes to which a minister of the Crown has given a guarantee;
- schemes which are not tax approved (or tax registered from April 2006) nor relevant statutory
- schemes under the tax rules for pension schemes;
- schemes with fewer than two members;
- schemes providing death in service benefits only;
- schemes which are relevant lump sum retirement benefit schemes;
- Chatsworth Estate Settlement Pension Scheme;
- schemes with fewer than 12 members where all members are trustees of the scheme;
- cross border schemes where the pension scheme in question is not UK registered;
- a superannuation fund as is mentioned in section 615(6) of the Income and Corporation Taxes Act 1988.
Schemes with a Crown guarantee will be exempt from the Pension Protection Fund. Schemes with a partial Crown guarantee will only be liable to pay the Pension Protection Fund levies for that part of the scheme that does not have a Crown guarantee.
Schemes which began to wind up or were completely wound up prior to 6 April 2005 will be exempt from the Pension Protection Fund.
In addition, except in certain circumstances, schemes where a compromise agreement has been reached between the scheme trustees and the employer concerning a debt under Section 75 of the Pensions Act 1995, will also be exempt from the Pension Protection Fund.
Exempt schemes will not be liable to pay the pension protection levies and also their members will not be eligible for Pension Protection Fund compensation.
The Pension Protection Fund will not be able to assume responsibility for eligible schemes in certain circumstances, for example, when a scheme has not been eligible throughout the three years previous to an assessment date.
Under what conditions will the company fund be eligible for protection under the Pension Protection Fund - links to more information
Conditions here. and the Assessment period.
Pension Payment Levies
The PPF will charge your company a levy - a sort of insurance - that companies pay to try to help fund it in case of more pensioners being transferred into it. Your company is assessed as to it's risk of going under and charged more accordingly.
See the Pension Protection Fund site here Pension Protection Fund site here
and here.
Pension Levies help fund the Pension Protection Fund:- Schemes eligible for protection by the Pension Protection Fund will be liable to pay the Pension Protection Fund levies and the scheme members may be entitled to compensation should an insolvency event occur in relation to the scheme's employer.
The PPF Pension Protection Fund
So what sort of fund is the Pension Protection Fund and is it big enough to pay the countries upcoming pension liabilities?
These figures as of end of January 2010, but they give an indication of the size and workings of the scheme.
- 113 schemes are now in the PPF
- 34,286 people are receiving or will receive compensation in the future
- the PPF paid out around £3 million in compensation from 1 January and 31 January 2010
- since opening its doors in 2005, the PPF has paid out around £119 million in compensation
- the average yearly payment is around £4,000 per person
- the oldest recipient is 104 years and the youngest is seven years old, and
- the PPF now has a total of 357 schemes and 203,473 members in the assessment period.
And if you're interested in more of this sort of information then the pension protection fund publishes an annual "purple book" that assesses everyone and everything in the industry. Link to the pensions purple book is here.
I'm already receiving my pension, what happens to my existing pension payments?
If you are already receiving a pension – and you have reached the scheme’s normal pension age – your payments will generally continue as normal. Also, payments generally continue as normal for anyone receiving a pension because of ill-health, or a pension in relation to someone who has died.
ref: assessment leaflet
I haven't yet reached retirement so what happens to my pension?
If you were yet to reach the scheme’s normal pension age when your employer went bust, we will pay you up to 90 per cent compensation when you retire – although this compensation is capped.
If you have retired early and have not reached the normal pension age, we will also pay you up to 90 per cent compensation, again this is capped and means the payments you are currently getting will reduce.
Who are these Pension Fund Trustees?
Pension fund trustees, the managers of your future.
It is their responsibility to manage the money in the pension fund well. Many of them are guilty of "over managing" the money and paying huge fees to investment managers to actively trade the money in the funds. On average over the industry these managers and their fees make the average pension fund lose more money than if they had put the money into the equivalent of a stock market "tracker fund" that just ebbed and flowed with the fortunes of the stock market.
They may be professionals, but they don't have to be. They may be part time and may not be even from a financial background. Yet they are having to make huge investment decisions in a complicated post credit crunch financial world. Make what you will of this situation.
There is an assessment process that the Pension Protection Fund will go through before paying up.
From the leaflet issued by the Pension Protection Fund website:
The assessment process is much like a commercial pension scheme ‘wind-up’ – and, if your scheme is eligible usually starts as soon as your employer goes bust. While assessment takes place, trustees remain in day-to-day control of your pension scheme and payments. We take over responsibility for payments only when assessment is complete – and if the scheme can’t afford to buy benefi ts which are more than the PPF would pay.
During the assessment, they will:
- work out how much money, and other assets, remain in the scheme
- make sure that the details of all the scheme members are up-to-date and accurate
- ask you to check that the details held about you are correct, and
- ask you to provide any changes to your details as soon as possible.
We aim to complete assessments for most schemes within two years. If you have reached normal pension age, your payments will generally continue as normal.
If you haven’t reached normal pension age and if the scheme allows, you may be able to take early retirement and receive payments during this period.
If your scheme is in assessment and you need further information, you must talk to your scheme trustees. Their contact details can be found on your pension benefit statement.
If your scheme enters the PPF, they will send you a welcome pack which:
- explains how compensation works, and
- includes a payslip and compensation certificate.
If you want more information about the PPF, contact number:
Telephone: 0845 600 2541
Text: 0845 600 2542
Email: information@ppf.gsi.gov.uk
Or write to the Pension Payment Fund at:
Stakeholder Support Team
Pension Protection Fund
Knollys House
17 Addiscombe Road
Croydon CR0 6SR
More General Pensions Information and help
Contact the Pensions Advisory Service (Opas) for general pensions information or if you are in dispute with your company's pension scheme.
The Opas helpline is on 020 7233 8080.
A list on the DirectGov site may help. Pensions and retirement planning help.
Complaints about occupational schemes
The Occupational Pensions Regulatory Authority (Opra) deals with complaints about occupational schemes. Contact 01273 627600.
Serious Complaints
If you have a dispute that you can not resolve with your employer or Opas you have the legal right to refer your complaint to The Pension Ombudsman deals with serious complaints.
Their address is: Pension Ombudsman, 11 Belgrave Road, London SW1V 1RB.