Your pension might be the biggest sum of money you’ll ever save and so it‘s understandable that you’ll want to keep it safe if you’re hoping for a comfortable retirement.
So, how secure is your pension and where you can get more help if you need it? Our pension fund safety guide shares how your level of protection depends on the type of pension you have; find out more about the Pension Protection Fund (PPF) and FSCS pension protection, below.
Protection for defined benefit pensions
A ‘defined benefit’ (DB) pension, also known as ‘final salary’ or ‘career average’ pension scheme, is a type of pension which provides retirement income based on your salary and how long you have worked for your employer.
These are generally now only available from older workplace or public sector pension schemes, but millions of people have DB pensions from past or present employments2.
You might have heard about DB pension schemes being in deficit. This is what happens when the cost of providing pensions is bigger than expected - perhaps because, on average, people are living longer, or perhaps because the money in the pension fund hasn’t done as well as expected (rates of return may have fallen).
In this case, the trustees of the pension scheme and the employer must agree a ‘recovery plan’ to deal with the shortfall over a period of years. Provided this all goes to plan, there’ll be enough money in the pension scheme to pay all the pensions.
Source 2 – https://www.thepensionsregulator.gov.uk/en/document-library/research-and-analysis/db-pensions-landscape-2021, accessed April 2022
What is the Pension Protection Fund (PPF?)
You may now be thinking, “if a company goes bust, what happens to my pension?”. That’s where the Pension Protection Fund (PPF) comes in. It’s their duty to protect people with a defined benefit pension when an employer stops trading.
If an employer becomes insolvent and they’re eligible, the PPF assesses the best course of action to take, from securing a buyout from an insurance company to the PPF making the pension payments to the affected pension owners themselves.
How much does the Pension Protection Fund cover?
The PPF will assess whether your pension scheme qualifies, and if it does, the compensation you receive typically depends on your age at the time when your employer became insolvent:
- 100% compensation if you’ve reached the scheme’s pension age. This also includes those receiving survivor’s pensions (widows/widowers, civil partners and children), or if you started receiving your pension early due to ill health3.
- 90% compensation if you’re below the scheme’s pension age3.
Source 3 – The Pension Protection Fund, What we do and how we protect pensions, dated June 2020, accessed April 2022
Pension Protection Fund limits
Despite the PPF offering pension protection, keep in mind that it pays compensation in line with the legal minimum of inflation – this could be less generous than your former company scheme.
Protection for defined contribution pensions
If, instead, you have a defined contribution pension, which is a pot of money that’s invested over your working life, then different rules apply. Where a DC pension is provided by a big financial institution like Royal London, there are strict rules to make sure that the pension provider has enough money to keep trading through the ups and downs of the economy. This helps to make sure that the company you’ve saved with is still there when you retire.
Other DC pensions may be saved through large industry-wide Master Trusts, and the government has tightened the rules to make sure that these trusts also have enough money to operate on an ongoing basis.
Where things go wrong with pensions and investments, there is a Financial Services Compensation Scheme. You can find out more about what it does and what it covers on the website.
Protection for defined contribution (DC) pensions
If you have a ‘defined contribution’ (DC) pension (a pot of money that you and your employer have contributed to over your working life), then different rules apply. Most workplace schemes are defined contribution pensions; these are usually run by pension providers, not employers, so if your employer does go bust, you won’t lose your pension.
Where a DC pension is provided by a big financial institution like Royal London, there are strict rules to make sure that the pension provider has enough money to keep trading through the ups and downs of the economy. This helps to make sure that the company you’ve saved with is still there when you retire.
Other DC pensions may be saved through large industry-wide Master Trusts, and the government has tightened the rules to make sure that these trusts also have enough money to operate on an ongoing basis. Also known as ‘trust-based schemes’, you’ll still get your pension if your employer becomes insolvent. However, you may receive less than you’d expected as the scheme’s running costs will come out of members’ pension pots, not from the employer.
Though DC pensions aren’t covered by the Pension Protection Fund, there are two independent organisations - the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) – which regulate all UK pension schemes to help keep your money as safe as possible. When things go wrong with pensions and investments, there’s also a Financial Services Compensation Scheme (FSCS).
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