What Happens To My Pension If My Company Goes Bust?
If a company became insolvent before 2005 then many scheme members would lose all the pension entitlements they’d built up.
The Pension Protection Fund (PPF) was set up in April that year to ensure that members had some form of compensation available to them.
Now the PPF protects millions of people in the UK who belong to Defined Benefit pension schemes in the event that the scheme can’t afford to pay their promised pension payout. According to the latest estimates they manage £32 billion of assets for over 249,000 members.
The PPF is a unique organisation both in the way it operates, is funded and the terms of their role. Accountable to parliament, they operate as an independent organisation and draw on the established best practices of both pension schemes and insurance companies to ensure they can offer the best protection and are financially secure.
They receive no public funding and rely on a levy from eligible Defined Benefit schemes for the substantial part of their income. They also receive money from the estates of insolvent employers – that’s an important part of their funding as it reduces the amount required to be raised from the levy.
Another of their main duties is to ensure that the ‘moral hazard’ risk is kept at a minimum – this stops unscrupulous employers trying to dump their DB schemes into the PPF to dispose of the financial burden.
They work closely with The Pensions Regulator (TPR) to ensure that any scheme that enters PPF is subject of a genuine employer insolvency event.
Qualifying DB schemes can only enter the PPF if they don’t have sufficient assets to cover the cost of providing compensation. The process formally begins once the sponsoring employer fails and the administrator has filed an insolvency notice.
There are two possible options available to DB schemes in insolvency.
Firstly, if the scheme is well-funded, they’d usually transfer their liabilities to an insurer. If the administration is successful and a buyout process follows then members will receive higher benefits than PPF compensation.
If sufficient funding isn’t available, the scheme enters PPF. If the scheme is well or poorly funded and the outcome isn’t in doubt, the process is simplified and fast-tracked allowing it to be marketed to seek a buyer sooner or enter into the PPF. Otherwise a full valuation is undertaken to assess the scheme’s eligibility. This is an intensive procedure requiring a full data cleanse and the time scale can be lengthy – up to two years or longer in more complicated cases.
During the assessment period, scheme members can’t transfer out although those that entered this process before the assessment began are honoured. If the scheme is eventually bought out or runs as a closed scheme (not taking in any more new members) then existing members can transfer out. No transfers out are allowed for any scheme entering PPF.
PPF benefits differ from regular scheme benefits and depend on members’ ages. Any member over the scheme’s normal pension age will receive full payment but there’s no increase on pre-1997 pensions while post-1997 pensions will increase in line with inflation up to 2.5% annually.
Members under the normal pension age have their compensation capped. This is set at £40,000 a year for 65-year-olds although members with more than 20 years service in the scheme get a higher cap – although their compensation level is reduced by 10%.
Liasing with the PPF and helping to get pension scheme members the best outcome is just one of the tasks professional insolvency practitioners do when working with companies in financial distress.
Fortunately there are usually several steps that can be taken by a business before it reaches this stage. You can contact us right now to arrange a convenient free discussion with one of our insolvency experts to talk about what hurdles your business is facing and how they can, if they can, be cleared.