How safe is your pension?

With many employers and companies going out of business, current savers and retired people can be left unsure about where they stand with their pension.

The situation depends on whether you have a defined benefit pension scheme or a defined contribution scheme.

This is a type of pension that will pay you a retirement income based on your salary and how long you’ve worked for your employer.

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

This type of scheme is protected by the Pension Protection Fund (PPF).

The PPF might step in and pay members retirement income as compensation if employers become insolvent and the scheme doesn’t have enough funds to pay their benefits.

The compensation might not be the same as if the employer hadn’t gone bust. The level of protection depends on whether you had passed your normal pension age when your employer became insolvent. 

If you were over your normal pension age or started receiving your pension early due to ill-health, you’re entitled to receive a full pension from the PPF. Anyone receiving a survivor’s pension, such as a widows/widowers pension, is also fully protected.

If you were under your normal pension age, you’re entitled to receive a pension of 90% of the amount you’ve built up when your employer became insolvent. Since July 2021, there has been no upper cap on this amount.

With this type of pension, you build up a pension pot to pay you a retirement income. It’s based on how much you and/or your employer contribute and how much this grows.

It’s also known as a ‘money-purchase scheme’, and includes workplace and personal pensions.

This type of scheme isn’t covered by the Pension Protection Fund. But there are several layers that help to keep your money as safe as possible.

Firstly, all registered pension schemes in the UK will be regulated by either the Financial Conduct Authority (FCA) or The Pensions Regulator (TPR).

These are both independent bodies which aim to protect members, reducing the possibility of things going wrong.

These organisations set out the rules under which pension schemes must operate and how they must manage the investments of pension plans.

To protect investors’ money, there are strict rules that govern the financial strength of companies, as well as the systems and controls they must have in place to protect your investments.

These organisations have many powers, including the ability to inspect the operations and risk controls your pension providers have in place. Providers have to report regularly on their financial strength.

The Financial Conduct Authority (FCA) is responsible for regulating the conduct of retail pensions. This includes personal pensions you might set up yourself and group personal pensions set up within your workplace.

This includes stakeholder pensions, self-invested personal pensions, Additional Voluntary Contributions (AVCs) and annuities. These are ‘contract-based’ schemes where a contract exists between you and the provider.

If you’re in one of these pensions and it was set up by your employer who has since gone bust, your money will be safe. This is because the pension assets are held in custody for you, by the pension provider.

The value of your pension savings can still be affected by changes in the investment markets at any time, as they can go up and down daily. The value of your pension may therefore go up and down too. This is investment risk, a normal part of investing.

There is still a risk that the investment companies your money is invested with could go bust. In this kind of pension, the provider should have committees in place to monitor and govern the investment options and can take action to change, stop and remove investments in the pension if necessary.

However, they can’t guarantee the security of your account. And these measures don’t fully protect your pension against every event.

If something happened to an investment provider, you would normally be able to apply for compensation from the Financial Services Compensation Scheme (FSCS).

Generally, this means you're protected up to £85,000 for each institution your money is invested. This includes money you’ve invested in your pension as well as any other savings accounts. It also includes money you have in cash with the same institution such as a bank account.

The FSCS doesn’t generally cover performance losses, such as if the shares you invest in go bust, although they can cover poor investment management.

If something happened to the pension provider overseeing your money, you would generally be able to claim compensation from the FSCS.

The FSCS aims to make sure you get back 100% of any loss.

The Pensions Regulator is responsible for regulating workplace pensions that are trust-based. This means the pension scheme is governed by a board of trustees.

Trustees are responsible for running the pension scheme in the interests of its members and securing members’ benefits. The role and duties of trustees are set by various laws.

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.

The value of your pension savings can still be affected by changes in the investment markets at any time, as they can go up and down daily. The value of your pension might therefore go up and down too. This is investment risk, a normal part of investing.

There is still a risk that the investment companies your money is invested with could go bust. Trustees have a duty to monitor and govern the investment options and can take action to change, stop and remove investments in the pension if necessary.

However, they can’t guarantee the security of your account. And these measures don’t fully protect your pension against every event.

In this kind of pension, if something happened to an investment provider, you wouldn’t be able to claim compensation from the FSCS.

You wouldn’t qualify for compensation because the pension scheme is the client of the investment provider rather than you as an individual.

The FSCS doesn’t generally cover performance losses, such as if the shares you invest in go bust. Although they can cover poor investment management.

If something happened to pension provider overseeing your money, you would generally be able to claim compensation from the FSCS.

The FSCS aims to make sure you get back 100% of any loss.

If you’re in a workplace pension, always contact your employer first if you have concerns about your workplace pension scheme.

You can also talk to your pension provider or administrator. This should be your first port of call for pensions you’ve set up yourself.

However, if you would also like to speak to an independent third party, or you just need more information, you can call us.