If the Scheme Can't Pay Your Pension

Can a company pension scheme run out of money?

Only final salary schemes can run out of money. It is not possible for a money purchase scheme to run out of money.

Money purchase schemes

The amount of pension that you receive is determined by the amount of contributions that have been made by you and your employer into your fund. It will then be based on how well the money was then invested. Each member of a money purchase scheme has a separate pension fund. While the amount that you may receive may decrease slightly if the investment was not successful, the only way that a money purchase scheme could run out of money is through fraud of theft. The Pensions Protection Fund may be able to compensate you in these circumstances.

Final salary schemes

The amount that you receive from a final salary scheme is based on your salary and the number of years that you have been a member of the scheme. Every person who is a member of a final salary scheme will be paid from one pension fund. In a final salary scheme, money may run out if the money that your company needs to pay out is more than the amount that they have invested. If this happens, the scheme is likely to have a compensation system put in place to help its members.

What will happen if your company becomes insolvent?

A pension fund cannot be put toward bailing out a company which has gone insolvent. There is a chance that your company may owe their pension scheme providers, who are likely to have ‘unsecured creditor’ status. There are creditors who fall below unsecured status.

With final salary pension schemes, if a company goes bankrupt, they are now classed as a debt to the company. This offers more protection to people who are members of final salary schemes, as it allows the trustees of the pension fund to chase the employer for any shortfall in the pension fund as if it were a credited debt. If the shortfall is not returned, you will receive a smaller pension. You may be able to get compensation from The Pension Protection Fund or the Financial Assistance Scheme.

The Pension Protection Fund (PPF)

If you are a member of a final salary scheme you will be protected by The Pension Protection Fund. They will pay you compensation based on the amount that you have lost out on when your company went into administration.

If your scheme meets the PPF regulations they will provide you with a regular payment. If you reached retirement age before your company went insolvent, you will get 100% of your pension in compensation. If you are under retirement age then you will receive up to 90% of your total pension fund in compensation. This is subject to the maximum of £26935.70 per year.

If your pension fund was affected negatively by fraud, the Fraud Compensation Fund may be able to provide you with compensation.

The Financial Assistance Scheme (FAS)

If you are a member of a defined benefit scheme and you have suffered a loss on your pension due to your company winding up after the January 1997 and the introduction of the PPF, you may be eligible for help from the FAS if:

  • Your scheme was underfunded
  • Your employer is now insolvent, no longer exists or has gone into an agreement with the trustees of your scheme to avoid becoming insolvent
  • Your scheme was wound up because it could not afford to pay out even if your employer continued to trade.

If you fit these and other specifications, the FAS may be able to pay you up to 90% of your expected pension in compensation.

Closing a final salary scheme

Trustees are in charge of making sure that your final salary scheme does not run out of money. If it looks as if this will happen, they can choose to do one of the following:

  • Close the scheme to new members, which means existing members can continue to make contributions to the scheme and will get a pension when they retire
  • Freeze the scheme so that it is completely closed and even existing members are no longer able to make contributions.

Your employer or the trustees of your pension scheme may also decide to wind up the scheme. This means that they will use the assets for its member’s benefits. If the company remains in business they will have to provide some kind of pension for its employees.

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