Your pension is likely to be one of your most valuable assets and therefore it’s vitally important to ask, are pension funds safe?
When I say safe I don’t mean in terms of investment performance risk, I mean, what happens if your pension provider was to go bust?
Unfortunately there is no protection against bad investment performance, that is just the risk you take with investing and should actually serve you very well over the long run.
When it comes to pension providers and investment firms going bust, the compensation you could be due will depend on the pension structure.
Are pensions funds safe? It will depend on the pension structure
For defined benefit pensions (e.g. final salary pensions) your pension benefits may be protected by the Pension Protection Fund (PPF) if the firm behind the pension scheme goes bust.
Defined benefit pensions and protection is a whole topic on its own which you can find out more on in this video.
For the purposes of this article we are going to focus on defined contribution pensions (e.g. money purchase pensions).
Throughout your life you are likely to have two different types of defined contribution pensions:
- Workplace pension
- Personal pension
Most defined contribution workplace pension schemes will be offered through an insurance company like Legal & General, Standard Life and Scottish Widows etc.
The insurer will have contracts in place with the individual investment managers that run the funds you can invest in.
If one of the investment management firms go bust then it is up to the pension provider to seek compensation if the appropriate value of the assets can’t be obtained. This is unlikely to happen due to the layers of protection in place with investment management firms – more on that in the next section.
However if the pension provider e.g. insurance provider went bust and failed to deliver what you were owed then the Financial Services Compensation Scheme (FSCS) will protect you up to 100% of the losses caused by the pension provider.
The FSCS will only protect you against firms that are regulated by the Financial Conduct Authority (FCA). To check your pension is regulated, search for the provider on the FCA register.
For personal pensions like SIPPs the potential FSCS protection is different and can get quite complicated.
The layers of protection to make pensions funds safe
For personal pensions like SIPPs there are essentially three different parts of the pension process that could go wrong.
#1 – Pension provider
Firstly, it’s important to remember that your pension provider does not hold your assets. They are only there to administer your plan and give you tools to manage your funds.
So usually if your provider was to go bust, this has no impact on the underlying funds.
If the pension provider was to go bust and through their fault you were at a loss then you would be entitled to claim up to £85,000 from the FSCS.
#2 – Investment firm
When you open a personal pension you usually invest into shares or units in an investment fund.
If you invest directly into shares of a company via your pension and the company you invest in goes bust you would not be due any compensation because this is just investment risk.
The same goes for investments into Investment Trusts and Exchange Traded Funds (ETFs).
However, most people will invest into units of funds managed by investment firms. Known as Open Ended Investment Companies (OEICs) or Unit Trusts.
The investment firm itself has layers of protection in place.
Trustee or depositaries are separate from the investment firm and look after the assets of an investment firm.
The trustees or depositaries are usually some of the biggest banks in the world. The assets are not actually held by the bank itself so are not under threat if the bank was to go bust.
Therefore if the investment firm was to go bust it should have no impact on the value of your assets as they are held by the depository or trustee. The depository or trustee is then duty bound to find a new investment manager to invest the assets.
If you did incur any losses through the wrong doing of an investment firm then you could be entitled to up to £85,000 compensation per firm via the FSCS.
#3 – Adviser
Finally, if you took financial advice in relation to your pension, then if you suffered a loss because of bad advice and your adviser was unable to pay you compensation, you could be entitled to up to £85,000 from the FSCS.
You could actually be entitled to more than this if you took your complaint to the Financial Ombudsman.
So as you can see, there is a lot of governance behind the scenes to make pension funds safe.
But has an investment fund ever gone bust?
Well, it’s reported that the only unit trust firm to have gone bust was Barings. You may remember the story of ‘rogue trader’ Nick Leeson and the collapse of Barings Bank in 1995.
In this story, even though the bank collapsed and people who held money with the bank lost out, the investors in the funds did not. In fact due to the layers of protection in place for investment funds, investors were unaffected and the funds still trade under the Barings name.
To make your pension funds safe you need to:
- Understand the type of pension you have and it’s structure.
- Make sure it is regulated by the Financial Conduct Authority.
Pension structures can be complicated so if you need help to know where you stand and what you need to do next please contact us. We are happy to offer an initial consultation at our expense where not only can we help explain your pension protection but also ways you can get better investment returns for less volatility.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
