How Does Insolvency Affect Pensions?

If your company has found itself in financial trouble, it’s highly likely that you’re wondering what will happen to your pension if the business becomes insolvent.

The financial consequences of insolvency can be complicated, but it will be good news to hear that in the majority of cases company pension funds will not be affected. However, this does depend on the type of pension scheme your company is enrolled in.

If you need to know more about pension fund insolvency, the team at Irwin Insolvency is here to explain everything you need to know.

Does Corporate Insolvency Affect Pension Schemes?

If a company is unable to pay its bills, it enters into a state of corporate insolvency. This can have several outcomes. The company could be placed into administration, it could be voluntarily liquidated, or it could be forcibly liquidated. In all of these scenarios, company assets may be sold off in order to pay creditors, while parts or all of the company can be closed down and liquidated.

As an employee or a company director, you may have a vested interest in a pension fund. Insolvency will no doubt be causing you great worry, especially if this pension fund has been accumulated over many years of hard work. However, in most cases pension funds are protected against insolvency, as they are held separately from other company finances and are not classed as assets.

This classification is important, as it means that company pension funds cannot be sold off as an asset in order to pay a company’s debt. However, it’s important to note that there are multiple schemes your pension money could be invested in, and this can affect what happens to your pension if the company goes into liquidation.

It’s also important to note that an insolvent company may fail to make payments into a company pension scheme while it’s facing financial difficulty. This means that you could miss out on pension payments if you continue working for the company while they are insolvent. You might be eligible to claim these missed pension contributions through the National Insurance Fund, but you may not see all of the money you are owed.

What Happens to My Pension if the Company Goes into Liquidation?

Liquidation is the process that occurs when a company is closed down, its assets sold and its name struck from the Companies House register. For all intents and purposes, the company ceases to exist, which is a worrying prospect for your pension fund.

There are two main types of pension schemes, and what happens will largely depend on the scheme your company is invested in. These are:

  • Defined contribution scheme
  • Defined benefit scheme

Let’s examine these two different schemes in more detail.

Defined Contribution Scheme

A defined contribution scheme is the most common type of pension scheme utilised by private companies in the UK. This type of pension scheme sees both you and your employer making regular payments into a pension pot, which is then invested into pension funds. The value of the pension pot will change over time, and the final amount will depend on how much has been paid in and how well the fund has performed.

A defined contribution scheme isn’t operated by your company, but by a separate pension fund provider. This means that your company has no stake in the fund, they simply pay contributions into it. In this instance, your money is protected if your employer is liquidated, as they have no control over or access to the fund.

Defined Benefit Scheme

The second type of pension scheme is the defined benefit scheme. This is more complicated, but these days, it’s rare to be enrolled in one as a new employee. A defined benefit scheme is also commonly known as a ‘final salary scheme’, and it’s intended to provide employees with a lifetime income on retirement that’s in line with inflation

A defined benefit scheme isn’t based on regular contributions made by you or your employer, but rather it’s based on how many years you’ve worked for the company or organisation, your retirement age, and the salary you are receiving when you retire. This type of pension requires a large investment on the part of the company, so it’s more common in the public rather than the private sector.

If you are entered into a defined benefit scheme, it’s possible for your pension fund to be lost if the company enters into liquidation. This has happened in the past, particularly when companies have abused the funds in the pension scheme. If your company is liquidated, then part of your final salary pension will be protected by the Pension Protection Fund.

Are There Pension Fund Insolvency Safeguards?

There are two insurance schemes that act as safeguards in the event of companies folding without meeting their pension obligations to employees. These are:

  • National Insurance Fund (NIF)
  • Pension Protection Fund (PPF)

National Insurance Fund

The National Insurance Fund is designed to protect employees who have a defined contribution scheme. If your company fails to pay into your pension fund due to insolvency, you are entitled to claim partial pension payments. The National Insurance Fund also covers redundancy payments, wages and holiday allowances that go unpaid.

Pension Protection Fund

The Pension Protection Fund is paid into by companies and public organisations that offer their employees a final salary pension. If a company is liquidated and unable to pay pensions, then the fund will continue to pay employees who have already retired with their full pensions. If you have yet to retire, then the fund will pay 90 per cent of your future pension when you do.

Contact Irwin Insolvency Today for More Information on Pension Fund Insolvency

If your company is facing financial difficulties or if you’re concerned about your pension in the event of insolvency, Irwin Insolvency is here to help.

Our experienced team of insolvency experts has decades of experience dealing with company insolvencies. We can advise company directors and employees on their obligations and rights in regards to pension fund insolvency.

Contact our team today to arrange your no-obligation consultation.

Contact Irwin Insolvency today for your free consultation

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0800 254 5122

About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.