Employer Folds: Defined Contribution Pension Scheme

Published / Last Updated on 06/09/2022

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:

Video 1 – this video – Defined Contribution Pension Schemes

2.  ER Folds DB Scheme Video 2 – Defined Benefit Schemes

3.  Er Folds DB Deficit Video 3 – Defined Benefit Schemes when the scheme is in deficit and there is not enough money in the business to cover the liabilities.

Defined Contribution Schemes

These are investment linked, money purchase, workplace pensions such as:

  • Personal Pension.
  • Grouped Personal Pension.
  • Occupational Money Purchase.
  • Workplace Pension.

Each month you and your employer pay a % of your earnings into a pension fund.  This is invested in pension investment funds that can do down as well as up in value.  The objective is that you grow the pension fund over the years and then at retirement, you have the choice of:

  • The whole pension fund is used to buy an annuity (a guaranteed income for life)
  • 25% of the pension fund is paid to you as a lump sum and the balance of 75% is used to buy an annuity (a guaranteed income for life).
  • The pension fund is moved into flexible drawdown, and you can drawdown as much or as little of the pension fund in regular amounts or lump sums (both tax free 25% and taxable 75%).  The balance of your pension fund remains invested ideally to grow over the years so that you can draw more out as it grows.  As it remains invested, the value can fall as well as rise.

Compensation and Protection

A defined contribution pension scheme is not held by your employer, it is usually with a regulated insurer pension provider such as Legal and General, Standard Life, Aviva, Aegon, Nest, One Pension etc.

If you employer becomes insolvent, your defined contribution scheme is not part of your employer, it is with an insurer, so it will not fold if your employer does.

If your regulated pension provider closes and go into liquidation, then you are protected by the Financial Services Compensation Scheme (FSCS) as follows:

  • Pension provider fails = 100% protected by the FSCS.
  • SIPP provider fails = £85,000 per person compensation as usually your pension investments will be other investments and funds inside the SIPP and they may not have gone under.
  • Financial Adviser fails after giving your poor pension advice = £85,000 per person compensation.
  • See https://www.fscs.org.uk/

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