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.
Firstly, you should check to see if your pension is safeguarded by the Pensions Protection Fund (PPF). This was set up in 2005 and oversees any compensation payments to members of their eligible pension schemes.
Each separate pension scheme puts in place its own rules to define what will happen if a company using their scheme 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 company liquidation.
There are two types of occupational pensions (those set up by your employer) these include final salary schemes and money purchase schemes.
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 in 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. This kind of pension scheme is covered by the PPF.
A money purchase scheme, also known as defined contribution scheme, invests the money you pay into it with the aim of giving you an amount of money at retirement. Your pension is based on the money paid in and how investments have performed over the years. It works by you paying in a percentage of money into the scheme from your wages on a monthly basis. Here, employers shoulder no financial risk aside from matching your pension contributions at a rate that has been previously agreed.
Once you are aware what type of pension scheme you are in, you can look into the procedures set out by these two different types.
If you are in a Final Salary Scheme, there is some protection for you from the PPF. However, as this is not a Government funded body, there are limits to the amount they can pay out in compensation to scheme members. Usually the PPF takes control of the scheme, if the scheme itself cannot match the level of compensation offered.
An assessment of the scheme’s eligibility begins and takes around four weeks to complete. Once confirmed as eligible, it will then need to be decided how much compensation will be paid; this can take up to two years. If you have already retired before the assessment starts, you will still receive your pension.
However, there are caps on compensation payments which came into effect on 1st April 2015. For those under 60 it is £31,439.18 and if you are over 65, the cap is £36,401.19. Those still working will usually receive around 90% of their benefits, depending on the maximum compensation that can be offered by PPF.
If you are in a Defined Contribution Scheme, your scheme is not affected by your employer’s company going into liquidation. This is because the scheme is independent of the company and has no direct connection to the status of your employer or business. You should be aware that you may lose out on the contributions made by your employer to your pension.
The contributions you have paid in are completely safe. In the event of any unpaid contributions from your employer, you can claim from the National Insurance Fund. These payments, if successful, are collected by your pension administrator or the Official Receiver dealing with the company’s liquidation.