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What to do if your company pension scheme is closed, frozen or wound up
If your company's having problems with its final salary pension scheme, then it may be closed to new members, frozen (closed to all members), or wound up (fully closed down). A 'final salary pension scheme' can also be called a 'salary-related pension scheme' or a 'defined-benefit pension scheme.'
Why final salary ('defined-benefit') schemes are closed or frozen
With a final salary pension scheme, the pension you receive on retirement is based on your salary and the number of years you've been in the scheme. All the money is put into one 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 due to pay out in the future – is more than the total value of its investments (which includes all the members' contributions made so far).
Your scheme's trustees are responsible for making sure it doesn't run out of money. To limit future cost, the employer or the trustees can either:
- 'close' the scheme to new members – meaning existing members can continue to contribute and receive a pension
- 'freeze' the scheme – meaning the scheme is closed to everyone and existing members' benefits stop building
What happens if your final salary scheme is closed to new members?
If your scheme is closed to new members, how this will affect you depends on your situation.
If you're already a member of the scheme, you shouldn't be affected, as the scheme would continue to run normally in all other respects.
If you're a new employee, you can ask your employer if it offers access to any other type of pension scheme, such as:
- a money purchase (or 'defined contribution') occupational pension scheme
- a group personal pension plan (GPPP)
- a stakeholder pension
If you join a GPPP or a stakeholder pension, your employer doesn't have to contribute to either, and you're likely to receive fewer benefits than employees who are members of your company's final salary scheme. Most GPPPs have an employer contribution, although this is not compulsory.
What happens if your final salary scheme is frozen?
Where a scheme is frozen, no further contributions are collected from current members. If you're a member of the scheme, the pension scheme administrator will tell you what benefits you've earned. Your employer will have to provide access to a different type of scheme in the same way as for new employees.
Why final salary schemes are wound up
Winding up is a process of ending an occupational pension scheme. This may happen for a number of reasons depending on the scheme's rules. These include:
- the company has gone out of business
- the company has merged with, or been taken over by, another business
- the employer has stopped contributing to the scheme
- The Pensions Regulator has directed a scheme to wind up
- the scheme's trustees have decided to wind up the scheme
Regardless of what triggered the scheme to wind up, the trustees are required to inform members that the scheme has started to wind up and provide the reasons for this within one month of doing so. They must also provide the name and address of a contact for further enquiries about the scheme. The trustees also have to provide information to members on a regular basis during the winding up process.
If your scheme is wound up, you can get advice from the trustees. You can also get advice from The Pensions Advisory Service, or from an independent financial adviser.
What happens if your final salary scheme is wound up?
What happens to your final salary scheme will depend on why it's wound up.
If your employer stays in business, but can't afford to carry on funding your scheme
The scheme's assets are valued to make sure the scheme is still in credit, so it can pay the benefits that scheme members expect. If it can't, your employer should make up the shortfall.
At the end of the winding up process, a number of options may be open to you. The main options are:
- the scheme's assets can be used to buy an 'annuity' - which guarantees future income
- your benefits could be transferred to another pension arrangement (for non-pensioners only)
If your employer's merging with or being taken over by another company
Your new employer has to provide access to replacement pension arrangements, and will give you details.
If your employer goes out of business
If your employer has become insolvent since April 2005 and your scheme can't pay the benefits you were expecting, you may be eligible for compensation from the Pension Protection Fund (PPF).
For more information, you can contact the PPF on 0845 600 2541 (8.00 am to 5.30 pm Monday to Friday).
If your employer becomes insolvent and your scheme can afford to pay benefits above the level of PPF compensation then the scheme will wind up independently of the PPF.
If your scheme started to wind up underfunded, between 1 January 1997 and 5 April 2005, and the employer is insolvent or no longer exists, you may be eligible for assistance from the Financial Assistance Scheme (FAS).
If you've already left the company
You may be able to transfer your benefits to your new employer's pension scheme or to a personal pension plan.
If you've paid into your company scheme for less than two years
You may be entitled to a refund of your contributions. You should check with your pension scheme administrator.
It's important to get advice from an independent financial adviser (IFA) or The Pensions Advisory Service before making any decisions about buying annuities or transferring your pension.
Where to get advice
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.
The Financial Services Authority (FSA)
The FSA regulates the sale of pension products. You can find information about pensions on its website.
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, you can call 0870 241 1144 (9.00 am to 5.00 pm Monday to Friday).
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