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Pension security

Your scheme is winding up

Winding up a workplace pension scheme means closing the scheme and ending the trust.

Winding up normally happens when an employer:

  • decides it no longer wishes to support the scheme by paying its contributions to the scheme (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).

The trustees set a date (the wind-up date) after which you will no longer be able to earn benefits under the scheme or pay into the scheme. The scheme rules may state the notice period that must be given to members if the scheme is winding up.

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

If it's decided 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 is happening.

What happens to your benefits on wind up:

Your right to benefits under the scheme is worked out according to the rules of the scheme. If you have not yet taken your benefits, the trustees will work out your transfer value. If you're a member of a defined benefit scheme and are receiving your benefits, the trustees will work out how much it would cost to buy an income from an insurer that is equal to your pension under the scheme.

When the trustees have worked out the total cost of the benefits for all the members, they will be able to see if there is 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 have been a member of the scheme for less than two years, you may be able to take a refund of your contributions to the scheme.

If your benefit value is lower than a limit set by the Government each year, you may be able to take a 'winding-up' lump sum.

Click here for details of how a winding-up lump sum is taxed.

 

What happens if your scheme does not have enough money to cover the benefits promised

There is a fixed order of priority for protecting members' benefits:

  1. Pensions and other benefits that are being paid either from the scheme or through an insurer
  2. Pensions and other benefits yet to be paid from the scheme, limited to what the Pension Protection Fund would pay
  3. Pensions and other benefits bought by additional voluntary contributions.
  4. Other benefits that you may have under the scheme, and pension increases.

 

What happens if your scheme is being wound up because your company has gone out of business

You may be able to claim compensation from the Pension Protection Fund.

Click here to find out more about the Pension Protection Fund.

 

Frequently asked...

Why does it take so long to wind up my final salary pension scheme?

Trustees only have one chance to wind up the scheme correctly, so they must get it right first time. They have to check the scheme data they hold for all their members, contact members who left the scheme many years ago, agree any Guaranteed Minimum Pension (GMP) with the National Insurance Contributions Office (NICO), carry out a valuation of the scheme to see if member benefits can be met in full and all these matters take time. However the Trustees have an obligation to keep members up to date with what is happening every 12 months.

My company has become insolvent and I want to know what will happen to the final salary pension scheme, which is in deficit?

What should happen is that the scheme actuary should 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 benefits as provided by the PPF then the scheme would not go into the PPF and your benefits will be bought out with an insurance company.

My employer (who operates a final salary scheme) is trying to avoid paying into the scheme because it is becoming too expensive and suggesting to all employees that the scheme is wound up and replaced by a money purchase scheme. What actions can we take

The employer must ensure that they are aware of the measures introduced in the Pensions Act 2004 that prevent employers walking away from their responsibilities under final salary schemes. The Pension Regulator’s website provides further details on this.

If the employer decides to cease funding for the accrual of future benefits, then so long as they follow any required consultations with employees and any Trade Union, there is nothing which can be done to prevent this happening, as it is invariably a commercial decision by the employer. The employer is the sponsor of the scheme and if he ceases his contributions to the scheme, this may trigger a wind up under the scheme rules. The only option is then for the employees to try and convince the employer to pay as much as he can afford into the replacement money purchase scheme, as the employer contribution is likely to be much less to the money purchase scheme than his contribution to the final salary scheme.

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

Whilst the scheme is in the assessment period, benefits must be restricted to the PPF levels and there is nothing which can be done about this. If at the end of the assessment period the scheme has sufficient assets to at least meet the PPF compensation, then 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 receive in the future.

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.

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