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What happens to your pension if your employer goes into liquidation?


Understanding pension compensation payments for employees

If your employer’s business goes into liquidation, your pension may be safeguarded by the Pension Protection Fund (PPF). This was set up in 2005 to cover compensation payments to members of eligible schemes.

The rules laid down within individual pension schemes also help to determine what happens in the event of liquidation, but if you are lucky enough to have a final salary (defined benefit) pension you will find that it is covered by the PPF.

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Final salary pensions

Also known as defined benefit schemes, final salary pensions are rarely offered these days due to their high cost and the financial risks borne by the employer. The value of a defined benefit pension is determined by an employee’s length of service, age at retirement, and of course the final salary level, as opposed to the total amount that has been contributed over the years.

If you have a defined benefit pension, you will be afforded some protection from the Pension Protection Fund. As the PPF is not government-funded, however, it operates with its own maximum levels of compensation that are available to pension scheme members.

The Pension Protection Fund will take over control if the scheme cannot match the level of compensation payments they offer. Here’s what happens with regards to the pension scheme once they have been notified of the company’s liquidation:

  • An assessment of the scheme begins, to determine eligibility - this takes around four weeks.
  • Once the scheme is deemed eligible, a process of deciding how much compensation will be paid to members begins - this can last for up to two years in total.
  • From the start date of the assessment period, those who have already retired will receive their full pension, with employees under retirement age receiving 90% of benefits dependant on the maximum levels offered by the fund.

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What are the caps on compensation payments?

Prior to retiring, you will receive an annual forecast of compensation payments. The Pension Protection Fund will also make contact around six months before you are due to retire, to let you know how to obtain your compensation pension.

Once the assessment phase has begun, you will not be able to transfer your money over to a new pension scheme unless you have already requested and accepted its transfer value, and arranged for it to be moved to a new provider.

Defined contribution schemes

If your employer runs a defined contribution, or money purchase, scheme they shoulder no financial risk apart from agreeing to match your contributions at a pre-agreed rate. Contributions are placed into a portfolio of stocks, shares and other investments, and the final amount of your pension depends on how well these perform.

If your employer goes into liquidation, the pension scheme is not affected as the scheme is independent and has no direct connection to your employer’s situation. You will only lose out on the pension contributions made by your former employer - the scheme itself is not at risk because the business has failed.

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In terms of unpaid employer contributions at the time of liquidation, claims can be made from the National Insurance Fund. These payments are generally claimed by your pension administrator or Official Receiver in cases of liquidation, via the Redundancy Payments Service. With nationwide offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

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