What happens to your pension if your employer goes out of business?

If your employer goes out of business – for example, it goes into administration, receivership or liquidation – and can no longer pay its pension contributions, the scheme you’re in is separate to the company’s assets.  Funds in the scheme can’t be paid to the employer’s creditors. Find out how your pension could be affected if your employer goes out of business.

How you’re affected depends on what type of pension scheme you’re in

What effect your employer going out of business will have on your pension depends on which type of scheme you’re in.

There are two types of pension schemes.

The first is known as a defined contribution (money purchase) scheme. Examples include:

  • a personal pension
  • a group personal pension
  • a stakeholder pension
  • a Master Trust scheme.

Under these schemes, you build up a pot of money to pay you a retirement income. It’s based on how much you and/or your employer contribute and how much this grows.

The second type of scheme is known as a defined benefit (final salary) scheme. This provides a retirement income based on your salary and how long you have worked for your employer.

Defined benefit pensions include ‘final salary’ and ‘career average’ pension schemes. They are generally now only available from public sector or older workplace pension schemes.

If you are unsure, speak to your pension provider.

Defined contribution scheme

If you’re in one of these workplace pensions and your employer goes bust, the pension you have built up will still be safe. This is because the pension assets are held in a separate trust overseen by a trustee company which looks after members’ interests. 

However, if your employer does become insolvent, you might not receive future pension contributions they have yet to make.

There’s also a risk that your employer has failed to pass some of the monthly contributions you have already paid onto the provider before becoming insolvent.

If this happens, you’ll need to contact the company who’s managing the insolvency and ask for compensation.

Depending on the circumstances, compensation may be claimed from the National Insurance Fund.

Normally, your own pension scheme administrator or the Official Receiver will make this claim on your behalf.

Defined benefit scheme

If you’re in a defined benefit scheme, it is likely to be protected by the Pension Protection Fund (PPF).

A scheme will only transfer to the PPF if it doesn’t have enough assets or money to buy at least PPF levels of compensation from an insurance company.

A scheme won’t transfer to the PPF if:

  • it’s rescued – for example, a new employer takes on responsibility for the scheme, or
  • it has enough assets or money to buy benefits with an insurance company, which are at PPF levels of compensation or above.

If your scheme goes into the PPF, you will get a guaranteed minimum level of compensation.

If you’ve passed your scheme’s normal retirement date, your pension will be paid in full. This also usually applies if you retired through ill-health or if you are getting a pension in relation to someone who has died.

If you’ve retired early or have yet to retire, you’ll receive a pension equal to 90% of the value of the one you were promised.

The PPF has a cap on this 90% compensation. From April 2020, the cap at age 65 is £41,461. This means your pension is protected up to £37,315 a year (taking into account the 90% cap).

From 6 April 2017, the long service cap came into effect for members who have 21 or more years’ service in their scheme.

For these members, the cap is increased by 3% for each full year of pensionable service above 20 years. This is up to a maximum of double the standard cap.

Annual increases in compensation might be different to the increases you would have got from your pension scheme.

In September 2018, the Court of Justice of the European Union ruled that individual PPF and Financial Assistance Scheme (FAS) members should receive at least 50% of their pension.

This ruling is only expected to impact a few PPF/FAS members. These people were contacted from 2019 onwards.

The PPF was set up by the government in April 2005. If you were a member of a defined benefit pension that started to be wound up between 1 January 1997 and 5 April 2005, you might be protected by the Financial Assistance Scheme (FAS).

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Whatever your circumstances or plans, move forward with MoneyHelper.

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