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What happens to my pension if my employer goes bust?

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Corporate insolvency – the number of businesses going bust – has fallen to its lowest rate since before the financial crisis, with just under 15,000 businesses failing in 2013 (the year for which the latest figures are available). But that will be cold comfort for their employees, who will have been left without a job and, in many cases, questions about the safety and security of their pensions.

Defined Contribution pension schemes

Pension scheme assets are protected by Trust law, which demands that pension scheme money is kept legally separate from the employer, and usually overseen by a board of Trustees, who have a legal duty to do their best for members.

Money purchase, or Defined Contribution, pension schemes are usually provided by an insurance company or similar organisation, through your employer. As such, should your employer go bust, your savings are protected, as they are generally held and managed by a separate company.

Although trust in banks and insurers is low following the financial crisis, money held by insurers is generally seen as safe, investment risk aside. Insurers are subject to very high levels of regulation that require them to have enough cash or other assets set aside to absorb all but the most heavy losses, which makes them more solvent and less likely to go bust – or need bailing out.  

Something else

For those with long memories, the shadow of Robert Maxwell and the collapse of his publishing empire loom large. The scandal that ensued after his death in 1991, when it emerged that he embezzled over £400million from his workers’ pension schemes, has led to much stronger measures being put in place to protect pension scheme assets and the rights of scheme members should their employer go bust.

Pension schemes have to file accounts every three years and are policed by The Pensions Regulator, which has powers to force employers to put more money in to support the pension scheme. Should an employer go bust, the Regulator also has the power to demand money be paid in to the scheme as part of the liquidation or administration process.

Safety for Final Salary schemes

Many members of final salary schemes – also known as Defined Benefit schemes – where the employer has gone bust, end up having their pensions paid by an organisation called the Pension Protection Fund (PPF). 

Generally, if you are a pensioner who retired at your scheme’s normal retirement age or who retired for ill-health reasons, you will get 100% of the pension owed to you. For members who were still working when their employer went bust, or who took early retirement, they will receive up to 90% of what they were entitled to, up to a maximum of just over £32,700 a year.

Although this might seem unfair, as higher earners lose out under the PPF, it actually only affects a limited number of people – the average UK pensioner has an annual income of just £11,600, including their State Pension, according to HMRC.

The PPF has just under 200,000 members and a specific requirement to invest safely and responsibly to protect its members’ pensions.

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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