Who pays my pension if my employer goes bankrupt?
- TBA
- Jun 19, 2024
- 4 min read
Recently, many large companies in the UK have declared bankruptcy. It was only last year that the major UK retailer Wilko went bankrupt, leaving thousands unemployed.
Besides from the job losses, what happens to the company’s pension scheme?
1. What is the Pension Protection Fund?
In April 2005, the UK government established the Pension Protection Fund (PPF), a public corporation managed by the Department for Work and Pensions (DWP).
It compensates employees with defined benefit pension plans or final salary pensions from bankrupt companies. When a company undergoes a qualifying insolvency event and the pension plan’s assets are insufficient to meet the PPF’s compensation level, the PPF steps in to provide compensation to eligible employees.
If your company goes bankrupt, the PPF will evaluate the pension plan you are part of to determine if the plan and its members qualify for compensation. This evaluation period generally takes up to two years.
2. Is my pension plan eligible?
The eligibility criteria for the PPF are defined under Section 126 of the Pensions Act 2004 and the Pension Protection Fund Regulations 2005.
Almost all defined benefit pension plans or those with defined benefit elements qualify. However, the following are not eligible:
Public service pension schemes
Public sector schemes for local government employees
Relevant lump-sum retirement plans
Cross-border schemes not registered in the UK
The Chatsworth Settlement pension scheme
Pension funds described in section 615(6) of the Income and Corporation Taxes Act 1988
Schemes with official guarantees (schemes with partial official guarantees are eligible only for the non-guaranteed part)
Unapproved or unregistered plans post-April 2006
Plans providing only in-service death benefits
Plans with fewer than two members
Plans with fewer than 12 members where all are trustees of the plan
Additionally, to qualify for the PPF, the following conditions must be met:
The company must have gone bankrupt after April 2005, and the pension plan must have been wound up after this date
The pension plan must be beyond rescue (if the plan has its own compensation rules, it doesn’t meet the PPF’s criteria)
There must be insufficient funds in the pension plan to pay the benefits you would receive from the PPF
3. How much will I receive from the PPF?
If your pension plan qualifies, the compensation you receive depends on whether you were over the normal pension age of the plan at the time of your employer’s insolvency.
For those already retired –
This includes those receiving a pension from their plan before the employer’s insolvency. The PPF typically pays 100% compensation, meaning you won’t lose any pension.
However, the annual increase of your pension might be affected. Only pensions accrued after April 5, 1997, will increase with inflation, capped at 2.5% annually. Pensions accrued before this date will not increase.
For early retirement/those who have not yet retired –
If you have not reached the normal pension age or retired early, you will receive 90% of your pension from the PPF (previously subject to a compensation cap).
A 2021 court ruling declared the cap illegal, so it no longer applies to new retirees, though the 90% limit still does.
Your pension will increase with inflation until you reach the plan’s specified retirement age. Upon reaching retirement age, pensions accrued after the 5th April 1997, will continue to increase with inflation, capped at 2.5% annually.
Pensions accrued before this date will not increase.
4. Changes to the compensation cap
In July 2021, the courts ruled that the PPF’s cap was illegal due to age discrimination. Therefore, the PPF no longer applies this cap to new retirees, though ongoing evaluations continue to follow the previous rules.
As of April 1, 2021, the compensation cap at age 65 was £41,461. If you retire earlier, the cap is lower; if later, the cap is higher. If you haven’t retired, the cap at age 65 is £37,315 (90% of the full compensation cap), and other cap amounts are multiplied by 90% to calculate your compensation.
For those with 21 or more years of service in the pension plan, there is an ‘enhanced’ long-service cap. Each year of service beyond 20 years increases the cap by 3%, up to twice the standard cap.
5. What if my company went bankrupt before April 2005?
The PPF only applies to companies and employers that went bankrupt on or after the 6th April 2005.
Before this date, compensation was managed under the Financial Assistance Scheme (FAS) rules for companies bankrupt between the 6th April 1997 and the 5th April 2005. The FAS pays 90% of the benefits you would have received, with an annual cap of £41,888. The FAS cap is not affected by the 2021 ruling.
For companies that went bankrupt before April 1997, there were no laws to protect employees. In these cases, you may have lost part or all of your pension.
You can use the government’s Pension Tracing Service to find out which insurance company took over your company’s pension. If unsuccessful, you can check with the Companies House for details of the administrators or liquidators managing your company’s insolvency.
6. Does the PPF Cover Defined Contribution Plans?
Most modern pension plans in companies are defined contribution (DC) pension plans.
The PPF does not cover DC plans. DC pensions are invested in the stock market, and your retirement income depends on contributions and investment returns, managed by a pension provider, not your employer.
If your employer goes bankrupt, you won’t lose your pension account but will lose future employer contributions.
7. What If My Pension Provider Goes Bankrupt?
If your pension provider goes bankrupt, you can claim compensation through the Financial Services Compensation Scheme (FSCS), managed by the Financial Conduct Authority (FCA).
For DC plans, the compensation depends on where your pension is held. If it qualifies as a ‘long-term insurance contract’, it is 100% protected by the FSCS. Annuities bought from FCA-regulated providers are similarly protected.
If your SIPP provider goes bankrupt, you can claim up to £85,000. Other pensions depend on the specific investments.
You will need to contact your pension provider for specific queries.