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What happens if your pension scheme is winding up

When a scheme winds up

Winding up normally happens when an employer:

  • decides they no longer want to support the scheme by paying its contributions (for example, because it finds the cost too high), or
  • can no longer pay its contributions (for example, because it has gone out of business).

If a decision to wind up the scheme is made, the trustees will set a date to wind-up the scheme. After this date, you’ll no longer be able to earn benefits under the scheme or pay into it.

The scheme rules might state the notice period that must be given to members if the scheme is winding up.

The trustees will get a detailed valuation of the scheme and deal with the wind-up and the way the scheme money is to be distributed. The scheme rules will state how this should be done.

If the decision is taken to wind up your scheme, it will usually take at least 18 months. During this time, the trustees have a duty to keep you informed of what’s happening.

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What happens to your pension benefits if the scheme is winding up

Your right to the money you’ve built up in the scheme is worked out according to the rules of the scheme.

If you haven’t yet taken any money, the trustees will work out your transfer value.

If you’re a member of a defined benefit scheme and are drawing money from the scheme, the trustees will work out how much it would cost to buy an income from an insurer that’s equal to your pension under the scheme.

When the trustees have worked out the total cost of the benefits for all members, they’ll be able to see if there’s enough money in the scheme to buy an income for all members.

If you haven’t taken your benefits, you can choose to transfer them to another scheme.

If you’ve been a member of the scheme for less than two years, you might be able to take a refund of your own contributions to the scheme.

If the total value of your benefits are £18,000 or less, you might be able to take a ‘winding-up’ lump sum.

Winding up lump sum

If you're able to take a winding up lump sum then how much you get will depend on whether you have already started taking money from the pension.

  • If you've started taking money from the pension then all of the lump sum will usually be taxed as earnings at the rate(s) of income tax relevant to you. 
  • If you haven't yet started taking money from the pension, then you can receive up to a quarter (25%) tax-free. The rest is taxed as earnings at the rate(s) of income tax relevant to you.

What happens if your scheme is being wound up?

If you have a defined benefit pension, the scheme will usually need to complete these tasks:

  • calculate whether there’s a debt the employer owes, and paying that debt if there is one
  • securing payment to members already receiving their pension
  • identifying the remaining share of assets for members not already receiving their pension, and getting terms from an insurer to secure those future pension incomes
  • issuing option letters to those not already receiving their pensions
  • conducting a final actuarial valuation
  • getting final audited accounts.

If you have a defined contribution pension, the scheme will usually need to complete these tasks:

  • members and beneficiaries are to be told that the scheme is winding up within one month of formally starting the wind-up
  • receive or recover all member and employer contributions due from the employer
  • establish that all pensioner members with annuity policies have them set up in their own name, providing the correct scheme benefits
  • account for all assets/cash held in trustee bank accounts and investment manager/provider accounts
  • establish that all other beneficiaries have been identified, pension pot values worked out and secured with statements then issued to members
  • provide options to members.

Why does it take so long to wind up my defined benefit pension scheme?

Trustees only have one chance to wind up the scheme correctly, so they must get it right first time.

They must:

  • check the scheme data they hold for all their members
  • contact members who left the scheme many years ago
  • agree any Guaranteed Minimum Pension with the National Insurance Contributions Office
  • carry out a valuation of the scheme to see if member benefits can be met in full

And all these take time. However, the Trustees must keep members up to date with what’s happening every 12 months.

What happens if my defined benefit scheme doesn’t have enough money to cover the benefits promised?

This type of scheme is protected by the Pension Protection Fund (PPF).

The PPF might step in and pay members retirement income as compensation if employers become insolvent and the scheme doesn’t have enough funds to pay their benefits.

The scheme actuary will carry out a valuation to see if the assets would support at least the compensation provided by the Pension Protection Fund (PPF).

If the assets will provide more than the compensation provided by the PPF, the scheme won’t go into the PPF and your benefits will be bought out with an insurance company. If the assets in the scheme won't support the level of compensation offered under the PPF, the scheme will move into the PPF. 

In either case, the income you get might not be the same as if the employer hadn’t gone bust. 

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My employer is closing a defined benefit scheme because it’s too expensive

My employer (who operates a defined benefit scheme) is trying to avoid paying into the scheme because it’s getting too expensive. They’re suggesting to all employees that the scheme is wound up and replaced by a defined contribution scheme. What actions can we take?

The employer must ensure that they’re aware of the measures introduced in the Pensions Act 2004 that prevent employers walking away from their responsibilities under defined benefit schemes. 

If the employer decides to stop paying into a defined benefit scheme, this means no further pension will be built up by members in the scheme. As long as they follow any required consultations with employees and any trade union, there’s nothing that can be done to stop this happening, as it’s a commercial decision by the employer.

The employer is the sponsor of the scheme. And if they decide to stop making contributions, this might trigger a wind up under the scheme rules.

The only option is for the employees to try and convince the employer to pay as much as they can afford into the replacement defined contribution scheme. This is because the employer contribution is likely to be much less to the defined contribution scheme than to the defined benefit scheme.

My employer became insolvent and my pension has been reduced

My employer became insolvent and we have been told that the pension scheme is in the assessment period for the Pension Protection Fund (PPF). I took early retirement at age 60 and even though we are not yet in the PPF, the administrators have reduced my pension

While the scheme is in the assessment period, benefits must be restricted to the Pension Protection Fund (PPF) levels.

If at the end of the assessment period the scheme has enough assets to at least meet the PPF compensation, your benefits will be bought out with an insurance company.

Depending on how much of the scheme assets exceed the PPF compensation benefit will determine how much you will get in the future.

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