There are many businesses that are struggling with increased costs of materials, goods, services, wage demands and inflation in general. During the coming recession, many businesses will fail.
We are tackling the question that sadly some of our clients will ask over the coming years:
“What happens to my company pension or workplace pension if my employer goes ‘bust’ i.e., insolvent and is being liquidated?”
Your employer is usually required to offer a workplace pension unless there are no qualifying employees. There are two types of pensions and we have produced three videos this week to help you understand what happens to your pension if your employer fails:
1. ER Folds DC Scheme Video 1 – Defined Contribution Pension Schemes
2. ER Folds DB Scheme Video 2 – Defined Benefit Schemes
Video 3 – this video – Defined Benefit Schemes when the scheme is in deficit and there is not enough money in the business to cover the liabilities.
Defined Benefit Schemes in Deficit i.e., ‘overdrawn’
In the previous video we look at what happens when an employer folds and the Pension Protection Fund (PPF) takes over to guarantee pension benefits of 100% for those that have reached or passed the Normal Retirement Age (NRA) of the pension scheme and 90% of benefits for those that are below the NRA of the scheme.
We now explore the conditions for how a failed employer can secure protection of the PPF for their employee members.
Not Enough Assets in Pension Scheme Funds to Cover the Scheme Liabilities
Under the Pensions Act of 1995 as amended in the Pensions Act 2004, the employer is responsible for the shortfall. The employer must make up the shortfall.
The issue being that when a company fails, pension scheme liabilities are not high priority in who gets their debts settled first. The order of priority on wind up of a company under the Insolvency Act 1986 i.e., who gets paid first from company asset sale on liquidation:
As you can see, defined benefit pension scheme debt, liabilities and shortfall deficits are way down the order of priority.
Some wind-ups will have enough funds to cover pension scheme deficits, but many do not, and defined benefit pension schemes of failed companies are then taken over by the PPF but how to get there? The reality is that most employers are already insolvent before they get to prioritising debt.
Securing PPF Protection
Under s.75 of the Pensions Act 1995 as amended 2004, notices must be issued to all interested parties that a pension scheme rescue is not possible.
Scheme administrators and trustees must prove that the insurance costs to ‘buy out’ i.e., purchase the pension scheme liabilities with a pension/insurer/provider cannot be paid for as there is not enough money/assets in the business.
A s.75 Debt Certificate is then issued by an appointed actuary.
This is when the PPF will take over with the 100% and 90% benefit protection. The PPF then runs your pension.
Flexible Apportionment Arrangement (FAA)
This is where a new buyer i.e., employer may have been found for some or all of the business. There may then be an FAA legal agreement which transfers pensions liabilities in the Scheme from one employer to another. It may even be where there are multiple employers in the scheme.
By way of a simple example, a holding group with multiple companies/employers within it and all being members of the same scheme e.g., a director of this site financialadvice.net worked for Legal and General Assurance Society Limited many years ago but within the L&G Group Plc at the time, and from memory, there was also Legal and General Investment Management Limited, Legal and General Property Limited, Legal and General Insurance Limited and a few others etc. All employees where members of the same scheme. So, if company A went under, company B may pick up a proportion of the liabilities.