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What happens to your pension if your former employer goes bankrupt? Does it simply vanish? In this article, our financial planners at Cedar House answers some common questions about your rights regarding workplace pensions – particularly if a scheme falls upon hard times. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Can you lose your company pension?
Most UK corporate employers in 2022 offer their employees a “defined contribution pension”, which builds up a pot of money for the latter over time. Under auto enrolment rules, employers must contribute at least 3% to the pot; the employer must put in a minimum of 5% (a total of 8%). This pension pot is typically held by a separate pension provider. This means that your pension will continue to exist and be managed even if you leave your employer. However, what happens if your company, or the pension provider itself, goes bust?
What happens to a pension scheme on a company’s insolvency?
You may remember the news when Philip Green, former boss of Arcadia Group, sold the BHS department store in 2015. It collapsed a year later, leaving a gaping £571m hole in the pension fund. Later, he agreed to pay £363m in cash to help rescue the scheme in a settlement with The Pension Regulator (TPR). Incidents like these, understandably, lead many employers to wonder what happens to their pensions if a business collapses.
When a company goes bust, typically its assets will be sold to pay creditors and settle its outstanding debts/liabilities. Fortunately, pension assets do not form part of a company’s asset list. This means they cannot be used to pay creditors during the insolvency process. The BHS incident also highlights the importance of protective governmental bodies – e.g. TPR and the Pension Protection Fund – to help protect workers’ pensions when companies fail.
What powers do The Pensions Regulator and Pension Protection Fund have?
The Pensions Regulator (TPR) is there to help reduce the risk of pension schemes ending up with the Pension Protection Fund (PPF). It works with employers to make sure they comply with auto enrolment rules, protect savers’ money and give them good value for money.
It is a public body sponsored by the Department for Work and Pensions (DWP) and works closely with the Financial Ombudsman Service, the Financial Conduct Authority (FCA), the Financial Services Compensation Scheme and the Money and Pensions Service.
Sometimes, however, TPR needs to refer a pension scheme to the PPF. This exists primarily to help protect people who belong to a “defined benefit” (or “final salary”) pension scheme. These types of pensions do not involve a pot of money, like a defined contribution pension, but should pay out a guaranteed income from the employer to former employees when they retire.
As the BHS case shows, clearly TPR has strong powers to help protect UK workers’ pensions when a company goes bust. For those with a defined benefit scheme, the PPF can provide compensation to members if an insolvent employer does not have sufficient assets to pay the pension income they promised.
Please note that the PPF does not cover public sector pensions. These are provided for out of general UK taxation and so are “unfunded”. Also, the PPF does not provide compensation for members of a defined contribution scheme (pensions with a “pot” of money). This is because the company is unlikely to owe much to the pension if it goes bust – perhaps only the value of unpaid contributions.
Do I need to do anything to protect my pension if my company goes bust?
It is a distressing time for scheme members when a business enters insolvency. However, employees do not need to make a scramble of calls and emails to protect their pension when this happens. Remember, you should be able to log into your workplace pension scheme portal at any time to check if everything is in order. These days, most platforms have a “live chat” function which allows you to ask the provider direct questions, if you are worried.
There is also the option to speak with a professional financial adviser to ensure everything is in order. They can help review the scheme for you and spot any “warning signs” that may suggest it is necessary to refer a matter to the governing bodies. Whilst TPR is more likely to investigate large, “high profile” employers like BHS of its own accord, employees in smaller companies may need to bring matters to their attention in certain situations.
Conclusion
In the UK, a range of strong protections are now in place to help protect workers’ pensions. Yet, as the BHS incident shows, schemes can still be mistreated and it is important to know your rights. Bear in mind, however, that company pension schemes are invested in stocks markets and other assets, which may go up or down in value over time. Protective government bodies like TPR will not make up for legitimate investment losses.
Here, it can help to craft a strong portfolio strategy for your pension with a financial adviser. This gives you the best chance of diversifying appropriately, catering to your risk profile and putting you on track towards your long-term financial goals.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk