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 are in is separate to the assets of the company. Funds in the scheme can't be paid to the employer’s creditors.
What effect your employer going out of business will have on your pension depends on which type of pension scheme you are in. There are two types of pension schemes. The first type of scheme is known as a defined contribution (money purchase) scheme – examples are a personal pension, a group personal pension, a stakeholder pension or, where you may have been automatically enrolled, a Master Trust type scheme. Under these schemes you build up a pot of money - the final amount available for income at retirement depends on how well your investments in the pot perform. The second type of scheme is known as a defined benefit (final salary) scheme, where your pension is based on how much service you have in the scheme, your age when you retire and your salary.
In a defined contribution scheme
If you are in a defined contribution scheme, this type of arrangement is operated independently of your employer so if your employer goes out of business the pension you have built up will not be affected. Once your employer is insolvent, you may lose future pension contributions that have yet to be made by them.
There is 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. Please see Pension security Paying contributions on time for more details. If this happens, you will need to contact the company appointed to manage the insolvency and request compensation. Depending on the circumstances, compensation can be claimed from the National Insurance Fund.
Normally your own pension scheme administrator or the Official Receiver will make this claim on your behalf.
In a defined benefit scheme
Please see our Spotlight guide Defined Benefits: How secure is my Pension?
If you are in a defined benefit scheme, ultimately the scheme is protected by the Pension Protection Fund (PPF). A scheme will only transfer to the PPF if it does not have enough assets or money to buy at least PPF levels of compensation from an insurance company.
A scheme will not transfer to the PPF if:
- the scheme is rescued, ie a new employer takes on responsibility for the scheme, or
- the scheme 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 receive a guaranteed minimum level of compensation.
If you have 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 receiving a pension in relation to someone who has died.
If you have retired early or have yet to retire, you will receive a pension equal to 90 per cent of the value of the pension you were promised. The PPF has a cap on this 90% compensation. From April 2020, the cap at age 65 is £41,461, which effectively means your pension is protected up to £37,315 per year (taking into account the 90 per cent 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 three per cent for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
Annual increases in compensation may be different to the increases you would have received from your pension scheme.
In September 2018 the Court of Justice of the European Union ruled that individual PPF and FAS members should receive at least 50% of their old age pension. This ruling is only expected to impact a few PPF/FAS members and the relevant individuals will be contacted from 2019 onwards
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.