You may be pleased that your company provided a final salary pension over the years but here we explain what happens to your final salary pension if the company goes bust.
The sponsoring company of a final salary pension going bust is probably the biggest risk this type of pension will face and a major reason why you may potentially consider a pension transfer.
For years final salary pensions were the standard type of pensions and employees felt secure knowing exactly what they would be paid from their pension when they retired. Final salary pensions are paid for by contributions from you and your employer. These contributions go into one big ‘pot’ and the company will invest the money to generate enough growth and income to pay out the pensions they have promised.
The problem nowadays is that people are living longer and the contributions and investment performance has not kept up with the amount of payments the income needs to pay out.
Most final salary schemes are in deficit meaning what they owe is more than what they have.
You can usually find the level of deficit your company has by looking at their latest accounts or a quick google search of the pension scheme’s funding position.
Companies are actually legally required to put deficit reduction plans in place meaning they need to agree an extra level of contributions to put into the pension scheme to ensure it does not remain in deficit for too long.
The problem is, what if the company’s future doesn’t look too bright? They may not be able make any more contributions because they can’t afford it. They may not be able to afford it because their business model is doomed. Think BHS!
If your company does go bust and the pension scheme is in deficit then it may enter the Pension Protection Fund. This is a statutory fund that gathers together all final salary pension schemes where the company is in trouble and there are not enough assets inside the scheme to pay the pension income promised to pensioners.
How the Pension Protection Fund works with your Final Salary Pension if the company goes bust
At the point it becomes clear the employer and final salary scheme are in trouble the Pension Protection Fund will go through an assessment period which could take up to two years. During this time the company will need to continue to honour its pension obligations.
If the Pension Protection Fund agrees to take over the final salary pension, the benefits you will be entitled to will be agreed by Pension Protection Fund rules. This may mean your benefits are reduced. They will be significantly reduced for higher earners.
The latest Pension Protection Fund payout rules can be found here.
Once the Pension Protection Fund takes over you will lose the ability to transfer out of the final salary pension scheme.
Action to take with your Final Salary Pension if the company goes bust
- Act before this becomes a possibility – find out your final salary pension scheme’s deficit position.
- Understand how your final salary benefits will be affected if it enters the Pension Protection Fund.
- Get professional advice and a review of your final salary pension. A decision to transfer should not be taken lightly but may be right in certain cases.
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