For those of us employed in the private sector, this can be a particularly worrying thought and stimulant to seek pension advice. After all, if your employer is the one paying into your pension, what happens if they run out of money to put into it?
Of course, the kind of pension you have with your company matters enormously. If you are on a “money purchase” or “defined contribution” pension, for instance, then you and your employer have been steadily building up your pension pot over the course of your employment.
This means that the money has already been set aside. So if your employer goes bust, you should still retain the pension pot you have been building up with your former employer’s contributions.
You would need to check, however, that your employer has actually paid contributions over to the provider of your DC scheme. From there, you could seek out new employment, and build up another pot with contributions from both you and your new employer.
If you are on a final salary scheme with your employer, however, then you will be in urgent need of pension advice if they become insolvent. Indeed, it would be a better idea to seek advice before that scenario can transpire, however unlikely it might seem.
Under a “final salary” (or “defined benefit”) scheme, your former employer promises to pay you an income throughout the course of your retirement. Typically, this income is based on factors such as your average earnings during your career, and the duration of your employment.
If you are on a scheme like this, and the company goes bust, then you certainly have bigger problems than someone who is on a defined contribution scheme. If the company that promises to pay you money in retirement is out of money, what are you to do?
Seeking independent pension advice now is a sound idea. It is likely that you will be able to work with your financial adviser to put risk-mitigating measures in place.
Or, it may actually turn out to be best to engage in a pension transfer to another scheme. One which protects the assets you have spent decades building up for your retirement. These are big questions, but worth working through with an experienced, independent specialist.
Protections For Pension Schemes
It is important to be aware of the important laws, organisations and regulations available to you when seeking out pension advice in the face of company insolvency.
One important body is the Pension Protection Fund, which pays compensation to pension scheme holders when an employer experiences a “qualifying insolvency event.”
One of the qualifying criteria for compensation, for instance, requires that the pension fund cannot meet its current and future liabilities. At this point, the PPF would get involved to make sure the pensions are still paid. It is, essentially, a kind of insurance scheme for DB / final salary pension holders.
However, be aware that there are presently caps on compensation payments. This means that you may now necessarily have all of your pension assets or income secured in the event your employer goes bust.
Since April 2015, the cap on compensation payments for those 65 years of age is £36,401.19. This assumes that members of the scheme have reached the agreed retirement age under the scheme. For those who have not reached retirement age, they can claim up to 90% compensation.
Should I Transfer To A Defined Contribution Scheme
Ultimately, this is a decision you should take only after seeking impartial, qualified independent pension advice. Everyone’s situation, financial needs and goals are different. What applies and is the right course of action for one person may not necessarily be so for you.
There are pros and cons to take into account. If, for instance, your final salary pension is worth £10,000 a year, then most of this is likely to be protected by the PPF. If however the figure is much higher, then you stand more to lose in the event your employer goes insolvent.
There is also the risk factor to consider. When you transfer from a DB/final salary scheme to a DC scheme, you essentially now bear the burden of responsibility for the investment risk. If your investments do well, then that’s great! If they do badly, however, then you might do worse under a DC scheme than you would have done under your DB scheme.
Another factor to consider is death benefits. Typically a final salary scheme will make provisions for a widow’s pension. If you are still working for your employer, they will also often receive a lump sum too. A DC pension, on the other hand, has a lot of flexibility and in many cases will pay your pension value, tax-free, to your beneficiaries.
The bottom line is, seek pension advice from an experienced, specialist financial adviser in pension transfers prior to making any decisions about a pension transfer.