If your employer goes into liquidation, your first concerns may well be focused on the immediate future – what does this mean for your job?
Are you going to be entitled to redundancy if your job no longer exists? When are you going to have to start looking for new employment?
However, in the midst of your immediate concerns, you should also look further ahead and consider what this means for your pension. As an employee it is likely that your employer was deduction a portion of your wages each month and, along with their own contribution, placing this money into a workplace pension scheme.
As this happened automatically and was done on your behalf, it may well be the case that you have little knowledge about how much money was in your pension pot or even who the pension provider is.
Is my pension safe if my employer goes into liquidation?
The consequences vary depending on if you are a part of a money purchase scheme or a salary related scheme.
A money purchase scheme (also known as a defined contribution pension scheme) is one where the money put aside for your pension is split into contributions, which have been agreed by yourself and the employer. This compares to a salary related scheme (also known as a defined benefit scheme) which is when your pension is paid in relation to the salary you will earn when you retire. The latter of the two is less common nowadays, due to the high risk and cost upon the employer.
If you were a part of a salary related scheme, the value of the pension would be defined by your length of service, age at retirement and the final salary level, not the total contribution over the years.
What is the Pension Protection Fund?
The Pension Protection Fund is a public corporation which sits within the Department for Work and Pensions. It pays compensation to people who have a defined benefit or final salary pension with a company that has gone bankrupt.
The Pension Protection Fund will become involved where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation. Companies with defined benefit pensions schemes that become insolvent can apply to have their pension schemes considered for PFF compensation if they meet the relevant rules – this is known is the ‘assessment’ period
Defined contribution scheme
Defined contribution schemes, also known as money purchase schemes, are commonly used in the workplace. With this type of pension, member benefits at retirement depend on the scheme’s performance over time, the level of contributions overall, and the charges made.
No financial risk is taken on by the employer in this instance, as the scheme is not directly associated with the company.
What happens to defined contribution pension schemes in liquidation?
When a company providing this type of workplace pension enters liquidation there’s no direct impact on the pension scheme as a whole and individual pension funds, as the scheme is administered outside of the company and is not directly connected.
In some cases a company approaching insolvency may fail to send contributions to the pension scheme because of their financial position, but employees can make a claim for unpaid contributions from the National Insurance Fund (NIF) on being made redundant.
Defined benefit scheme
Also known as a final salary scheme, a defined benefit pension provides an income for life and members receive a fixed sum each month on retirement. The scheme doesn’t rely on the underlying investments’ performance, as is the case with a defined contribution scheme.
Defined benefit schemes are relatively rare these days given their cost to run, and the fact that the employer takes on a high financial risk. The final payments are calculated using each employee’s length of service, their final salary, and the age when they retire.
What happens to defined benefit pension schemes in liquidation?
If your company runs this type of pension scheme and it can’t meet its pension obligations to current and former employees, the Pension Protection Fund (PPF) is there as a safeguard. The PPF receives regular contributions from companies that run these types of pension.
PPF benefits differ from regular scheme benefits and depend on members’ ages. Any member over the scheme’s normal pension age will receive full payment but there’s no increase on pre-1997 pensions while post-1997 pensions will increase in line with inflation up to 2.5% annually.
In the event of a company’s liquidation it covers pension payments in full for former employees who have already retired, and up to 90% of the value of the pension for yourself and other employees who are yet to retire.
Workplace pensions are complex, and may be subject to rules laid down within each scheme. This is why it’s important to seek specialist advice if your company is experiencing financial distress.
What is the fraud compensation fund?
If your employer went bust and the value of the pension fund has lost money because of dishonesty or fraud, there is a separate fund to pay compensation. This is called the Fraud Compensation Fund. It covers most workplace defined benefit and defined contribution pension schemes (but not personal pensions or the state pension).
Call us today for expert guidance
If you are a company director and are considering liquidating your company, and would like to know more about what this would mean for you and your employees call us today to speak to a licensed insolvency practitioner.
We can offer you a completely free no-obligation consultation where you can learn more about the various liquidation options and understand the most appropriate course of action for you and your business. With offices located across the UK, you’re never far away from expert and confidential advice.