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What to do if your company pension scheme can't pay your pension
If your company pension scheme runs out of money and the company itself becomes insolvent, your pension could be at risk. There are, however, schemes that provide financial assistance if you have lost out on your pension (depending on factors such as the type of pension and when the pension was wound up).
Can a company pension scheme run out of money?
It's possible for a scheme to run out of money if it's a 'final salary' scheme. It can't run out of money if it is a 'money purchase' scheme.
Money purchase scheme
Your contributions (and those of your employer) are invested on your behalf by an insurance company, or a professional manager. The amount of eventual pension you will get is unknown in advance as it depends on how well the investment has performed. In that sense, the scheme can only have a shortfall where there has been fraud or theft. In such circumstances, it may be possible to recover some of the money through the Pension Protection Fund.
Each member of a money-purchase scheme has a separate pension pot which provides their benefits.
Final salary (or 'defined-benefit') scheme
The amount you get is based on your salary and the number of years you've been in the scheme. All the money is put into one pension pot which provides benefits for all its retired members.
Your scheme can run out of money if the amount it has to pay out now - or the amount it's promised to pay out in the future - is more than the total value of its investments (which includes all the members' contributions made so far).
In most cases, if a scheme runs out of money, there is support available to compensate members.
What happens if your company becomes insolvent?
If your company becomes insolvent, its pension fund can't be used to pay the company debts, so the fund is protected.
The company may however, owe the pension fund money. The pension fund is usually an unsecured creditor but may have secured a higher preferential status with the employer in some cases. There are other creditors below those of unsecured creditors.
There is existing provision in legislation under which a deficit in a final salary related occupational pension scheme that winds up becomes a debt on the employer. This is designed to improve the protection offered to scheme members when these events occur. It provides a mechanism for the trustees to take action to pursue the shortfall owed to the scheme from the employer.
A shortfall in the fund could mean that you receive a smaller pension. You may, however, be eligible for financial help from the Pension Protection Fund (PPF) or the Financial Assistance Scheme (FAS).
The Pension Protection Fund (PPF)
Members of defined benefit occupational pension schemes are protected through the Pension Protection Fund, which will pay regular compensation, based on your pension amount, if the company becomes insolvent and the pension scheme doesn't have enough money to pay your pension. The PPF applies to most defined benefit occupational pension schemes whose employers become insolvent after 6 April 2005.
If your company's pension scheme meets the PPF conditions, the PPF will pay you regular compensation. If you have already reached your scheme's normal retirement age, you will be entitled to compensation equivalent to 100 per cent of your pension. If you have not yet reached the scheme's normal retirement age you will receive compensation equivalent to 90 per cent of your pension entitlement, subject to PPF rules and up to a maximum of £26,935.70 a year, when you retire.
If your company's pension scheme has suffered a reduction in assets as a result of an act - or a failure to act - that constitutes fraud, an application may be made to the Fraud Compensation Fund which is managed by the Board of the Pension Protection Fund. The PPF took over this responsibility from the Pensions Compensation Board from 1 September 2005. Unlike other aspects of the PPF this provision applies in respect of most defined benefit and defined contribution schemes.
The Financial Assistance Scheme (FAS)
If you're an individual scheme member and have lost out on your pension as a result of your scheme winding up after 1 January 1997 and the introduction of the PPF you may be able to get financial help from the FAS if:
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your defined benefit scheme was underfunded and
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your employer is insolvent, no longer exists or has entered into a valid compromise agreement with the trustees of your pension scheme to avoid insolvency, or
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in some circumstances, your final-salary scheme was wound up because it could not pay members' benefits even if the employer continues trading
If you satisfy certain other conditions the FAS will pay assistance to make up 90 per cent of accrued pension from your normal retirement age or 14 May 2004 which ever is later. Normal retirement age is the age you would retire at, as stated in your pension scheme rules.
More information about the FAS, which schemes qualify and what conditions you may have to satisfy is on the Department for Work and Pensions (DWP) website.
In the case of fraud or theft
If a shortfall in your company's pension fund is due to fraud or theft, it may be possible to recover some of the money through the PPF (read 'The Pension Protection Fund (PPF)' above) who opperate the Fraud Compensation Scheme.
For more information, call the PPF on 08456 002 541 (8.00 am to 5.30 pm Monday to Friday).
Closing a final salary scheme
If you belong to a final salary pension scheme, its trustees are responsible for making sure it doesn't run out of money. To limit future costs, the employer or the trustees can:
- ‘close’ the scheme to new members - meaning existing members can continue to contribute and receive a pension on retirement
- ‘freeze’ the scheme - meaning the scheme is closed to everyone and existing members' benefits stop building
An employer (or the trustees) may also decide to 'wind up' a pension scheme at any time. This involves closing down the scheme to everyone and using its assets for the members' benefit. If the company remains in business, it may at least have to provide access to a stakeholder scheme (to which they don't have to contribute) as a replacement.
Where to get help
Your pension scheme trustees
You pension scheme trustees can give you advice about your pension scheme.
Your pension scheme administrator
Your pension scheme administrator can answer specific questions about your pension.
The Pensions Advisory Service
The Pensions Advisory Service gives independent advice on general pension rules and regulations. For more information, you can call their helpline on 0845 601 2923 (9.00 am to 5.00 pm Monday to Friday).
The Pension Protection Fund
The Pension Protection Fund provides compensation to members of most defined benefit/final salary pension schemes where the employer becomes insolvent after 6 April 2005. It also provides for schemes that suffer loss due to fraud.
For more information, call 0845 600 2541 (8.00 am to 5.30 pm Monday to Friday).
The Financial Assistance Scheme
The Finanacial Assistance Scheme provides assistance to members of occupational defined benefit schemes which wound up between 1 January 1997 and 5 April 2005.
The Pensions Regulator
The Pensions Regulator has powers to regulate the way that company pension schemes are run, and to investigate pension fraud and badly run schemes.
For more information, call 0870 241 1144 (9.00 am to 5.00 pm Monday to Friday).
The Pensions Ombudsman
The Pensions Ombudsman investigates complaints about how pension scheme rules are applied. For more information, call 020 7834 9144 (9.00 am to 5.00 pm Monday to Friday).
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