What happens to your pension if your employer goes out of business?

How your employer going out of business will affect your pension depends on which type of scheme you’re in.

There are two types of pension scheme.

The first is known as a defined contribution (money purchase) scheme. Examples include:

• a personal pension
• a group personal pension
• a stakeholder pension
• a Master Trust scheme.

Under these schemes, you build up a pot of money to pay you a retirement income. It’s based on how much you and/or your employer contribute and how much this grows.

The second type of scheme is known as a defined benefit (final salary) scheme. This provides a retirement income based on your salary and how long you have worked for your employer.

Defined benefit pensions include ‘final salary’ and ‘career average’ pension schemes. They are generally now only available from public sector or older workplace pension schemes.

If you are unsure, speak to your pension provider.

If you’re in one of these workplace pensions and your employer goes bust, the pension you have built up will still be safe. This is because the pension assets are held in a separate trust overseen by a trustee company which looks after members’ interests. 

However, if your employer does become insolvent, you might not receive future pension contributions they have yet to make.

There’s also a risk that your employer has failed to pass on the provider some of the monthly contributions you have already paid before becoming insolvent.

If this happens, you’ll need to contact the company that's managing the insolvency and ask for compensation for the value of these missing monthly contributions.

Depending on the circumstances, compensation may be claimed from the National Insurance Fund.

Normally, your own pension scheme administrator or the Official Receiver will make this claim on your behalf.

If you’re in a defined benefit scheme, it is likely to be protected by the government's safety net, the Pension Protection Fund (PPF).

A scheme will only transfer to the PPF if it doesn’t have enough assets or money to buy at least PPF levels of compensation from an insurance company.

A scheme won’t transfer to the PPF if:

• it’s rescued – for example, a new employer takes on responsibility for the scheme, or
• it has enough assets or money to buy benefits with an insurance company, which are at PPF compensation levels or above.

If your scheme goes into the PPF, you will get a of compensation.

If you were over your scheme’s normal retirement date when your employer went out of business, your pension will be paid in full. This also usually applies if you retired through ill-health or if you are getting a pension in relation to someone who has died.

If you were under your scheme’s normal retirement date at the time your employer went out of business, you’ll receive a pension of around 90% of the value of the one you were promised.

Annual increases in compensation might be different to the increases you would have got from your pension scheme.

The PPF was set up by the government in April 2005. If you were a member of a defined benefit pension that started to be wound up between 1 January 1997 and 5 April 2005, you might be protected by the Financial Assistance Scheme (FAS).