Understanding pension compensation payments for employees

In case your employer’s business comes under liquidation, your pension might be protected by the Pension Protection Fund (PPF). It was established in 2005 to provide compensation to members of eligible schemes.

The regulations within specific pension schemes also play a role in deciding the outcome during liquidation. However, if you’re fortunate enough to have a final salary (defined benefit) pension, it falls under the coverage of the PPF.


What are the final salary pensions?

Often referred to as defined benefit schemes, final salary pensions are seldom provided nowadays because of their expense and the financial liabilities they impose on employers. 

The worth of a defined benefit pension is based on an employee’s years of service, age at retirement, and, notably, the final salary level, rather than the cumulative contributions made over time. 

If you possess a defined benefit pension, you’ll receive a degree of safeguarding from the Pension Protection Fund. 

Nonetheless, since the PPF isn’t backed by the government, it functions with its own predetermined maximum compensation levels accessible to members of pension schemes.

The Pension Protection Fund steps in to manage the situation if the scheme cannot meet the compensation payments they promise. 

Here’s what occurs concerning the pension scheme once they’ve been informed of the company’s liquidation:

  • Once the scheme is considered eligible, the process of determining the compensation amount for members begins, which may take up to two years in total.
  • An evaluation of the scheme commences to ascertain eligibility, typically taking about four weeks.
  • From the start date of the assessment period, those who have already retired will receive their full pension, with employees under retirement age receiving 90% of benefits depending on the maximum levels offered by the fund.


What are the caps on compensation payments?

Before retiring, you’ll receive an annual forecast of compensation payments. The Pension Protection Fund will also reach out approximately six months before your retirement date to guide you on obtaining your compensation pension.

Once the assessment phase starts, you won’t be able to transfer your funds to a new pension scheme unless you’ve already requested and accepted its transfer value and made arrangements for it to be transferred to a new provider.


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Defined contribution schemes

If your employer operates a defined contribution, or money purchase, scheme, they bear no financial risk except for agreeing to match your contributions at a pre-determined rate. 

Contributions are invested in a portfolio of stocks, shares, and other investments, and your pension’s final value depends on how well these investments perform.

If your employer goes bankrupt, the pension scheme remains unaffected as it is independent and not directly linked to your employer’s circumstances. 

The only loss you might face is in the pension contributions made by your former employer. The scheme itself is not jeopardised due to the business failure.

Regarding unpaid employer contributions during liquidation, claims can be made from the National Insurance Fund. Typically, your pension administrator or Official Receiver will claim these payments in instances of liquidation through the Redundancy Payments Service. With offices nationwide spanning from Inverness to Exeter, Vanguard Insolvency provides exceptional director advice throughout the UK.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.