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What happens if your employer becomes insolvent?

We know that some high street retailers have been struggling for some time now and the impact of Covid-19 may just be the final straw.

If you would like to find out how redundancy will affect your pension rights please access our Pensions and Redundancy Guide here.

Alternatively, if you are worried about what will happen to your pension if your company fails, you can find out more information here:

Pension Protection Fund (PPF)

The Pension Protection Fund (PPF) is a public body set up by law to protect members of eligible defined benefit pension schemes.
 
Defined benefit schemes are where your pension is worked out according to your years of membership and your salary. They are more commonly known as Final Salary Schemes or Career Average.
 
If you are a member of an eligible defined benefit pension scheme and your employer fails, the PPF will compensate you if your scheme can’t afford to pay your promised pension.
 
For a pension scheme to be considered for entry into the PPF the following criteria must all be met:

  • The scheme must not have started being wound up before April 2005.
  • The employer responsible for paying contributions must have become insolvent.
  • There must be no chance of the scheme being rescued.
  • There must be insufficient assets in the pension fund to pay benefits at the PPF levels of compensation.

 The current levels of PPF compensation are as follows:

Member’s status % of your scheme benefits provided by the PPF Compensation capped
You are older than your scheme’s normal retirement age 100% No
You are receiving a scheme pension on ill-health grounds 100%
No
You are younger than your scheme’s normal retirement age and receiving a scheme pension 90% Yes
You are younger than your scheme’s normal retirement age and not yet receiving a scheme pension 90% Yes

For more information on insolvency, the PPF and more, read our Pensions Guide.

For members under the scheme’s normal retirement age, the amount of compensation is currently capped at £37,315 (2020/2021) a year. This cap is reduced if you start drawing your PPF pension earlier than 65 and increased if you start drawing your PPF pension after 65.
 
After they start paying you, the PPF will increase your pension every year but only that part of it built up after April 1997. The increase is linked to the Consumer Price Index (CPI) and is capped at 2.5% a year.
 
The PPF is not paid for by the taxpayer. It gets its money from a levy imposed on the employers who sponsor defined benefit schemes and are covered by the PPF.
 
The PPF currently looks after more than 400,000 people whose employers have already failed and  despite recent market volatility, they are reassuring the public that they are well funded and well prepared to compensate existing, and future, members for as long as needed.
When a company fails this activates a trigger and the pension scheme will go into the PPF assessment period. It is during this period that the PPF will determine whether the pension scheme can be rescued in some way or whether the scheme can afford to secure benefits at the same level of compensation that the PPF can provide.
 
If neither of these are an option the pension scheme will enter into the PPF.
 
This process can take up to two years, but you should receive a regular communication explaining each step of the process by the scheme administrators who will be appointed by an Independent Trustee.
 
If you would like to talk to someone on the Usdaw Pensions Team please get in touch with us on 0161 224 2804 or email us at [email protected]

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