If my employer goes into liquidation, does it affect my pension?

As an employee of a company, you may be paying into a pension scheme as a deduction from your monthly wages. But what happens to your pension if the company you work for goes into liquidation?

The following is general information about pensions, but for specific advice relating to your own pension, you should speak to an Independent Financial Advisor (IFA) or a pension specialist.

The Pensions Protection Fund (PPF)

Firstly, you should check to see if your pension is safeguarded by the Pensions Protection Fund (PPF). The fund was set up in 2005 and oversees any compensation payments to members of their eligible pension schemes.

Each pension scheme puts in place its own rules to define what will happen if a company using it goes into liquidation. It is very much dependent on the type of pension scheme you are in as to what will happen in the event of a liquidation.

Two different types

There are two types of occupational pensions (those set up by your employer) these include final salary schemes and money purchase schemes.

Final Salary Scheme

Final salary schemes, sometimes known as defined benefit schemes, are linked to your salary. When your salary increases, for whatever reason, your contribution also rises. You pay a set percentage from your salary, and your employer contributes the rest. At retirement, your pension is based on pay and the number of years you have been in the scheme. The PPF covers this kind of employee pension scheme.

Money Purchase Scheme

A Money Purchase Scheme, also known as a Defined Contribution Scheme, invests the money you pay in, intending to give you an amount at retirement. Your pension is based on the money paid in and how investments have performed over the years. It works by you paying a percentage of your monthly wages into the scheme. Here, employers shoulder no financial risk aside from matching your pension contributions at a rate previously agreed.

What happens in liquidation

Once you are aware of what type of pension scheme you are in, you can look into the procedures set out by those different types.

• For workers on the Final Salary Scheme, there is protection from the PPF. However, there are limits as to what they can pay out in compensation as they are not a government-funded body – There will first be an assessment of the scheme’s eligibility, which takes around four weeks to complete.
• There are also caps on the compensation that can be offered by the PPF, which came into effect on 1st April 2015. For those under 60, it is £31,439.18 and for those over 65, it’s £36,401.10.
• If you are in a Defined Contribution Scheme, employers won’t be affected by their company going into liquidation as the scheme is independent from any company. Employers, can, however, lose out on contributions made by their company. In the event of any unpaid contributions from an employer, employees can claim from the National Insurance Fund during a liquidation.

In summary

If the company you work for goes into liquidation, you’ll probably be concerned about what could happen to your pension, and you may find it difficult to know what to do. A lot of what could happen will depend on what kind of pension you have, and whether the Pensions Protection Fund (PPF) covers it. Your employer could have set up two types of employee pension scheme; a Final Salary Scheme, which provides some level of protection, but because it’s not government-funded, pay-outs will be limited. Alternatively, a Money Purchase Scheme or Defined Contribution Scheme is independent of your employer; so it won’t be affected if they become insolvent, although you could lose out on contributions your employer has made.

If you’re not already aware of what will happen to your pension, make sure you do your research and find out as soon as you can. Get in touch with the Official Receiver dealing with the liquidation, your employer or an IFA, for information and advice.