Will I lose my pension if my company goes bust?
In recent years, a number of big-name companies have gone bankrupt, plunging thousands of employees' livelihoods and, crucially, their retirement savings into turmoil.
This is an incredibly distressing time for people, but there is a safety net to provide some relief - the Pension Protection Fund.
Set up by the government more than a decade ago, the Fund takes over the pension schemes of insolvent companies to ensure workers still get some of their pension.
This guide explains how the Pension Protection Fund works, how much pension you can expect to get if your scheme is in the Fund - and how the cap on pension payments is applied.
What is the Pension Protection Fund?
The Pension Protection Fund is a public corporation which sits within the Department for Work and Pensions.
It pays compensation to people who have a defined benefit or final salary pension with a company that has gone bankrupt.
The Pension Protection Fund will become involved where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation.
Companies with defined benefit pensions schemes that become insolvent can apply to have their pension schemes considered for PFF compensation if they meet the relevant rules - this is known is the ‘assessment’ period.
Is my pension scheme eligible for Pension Protection Fund?
The fund applies to defined benefit schemes and the defined-benefit part of hybrid pensions, which also contains defined contribution and money purchase pensions.
It does not cover public service pension schemes.
For a scheme to enter the Pension Protection Fund the following must apply:
- the company has gone bust after April 2005 and the pension scheme is being wound up after this date
- there must be no chance that your pension scheme can be rescued
- there isn't enough money in the pension scheme to pay the benefits you would get in the Pension Protection Fund
How much of my pension will I get in the Fund?
For those that have retired
This covers people receiving a pension from their scheme before their former employer went bust.
The Pension Protection Fund will usually pay 100% level of compensation, meaning that you shouldn't lose any of your pension.
But how much your pension increases by every year could be affected.
Only payments from your pension built up after 5 April 1997 will rise in line with inflation each year, subject to a maximum of 2.5%.
But payments built up before that date do not increase.
For early retirees and those yet to retire
If you haven't reached retirement age yet, or you retired early, you'll get 90% of your pension in the Pension Protection Fund.
Your pension will rise with inflation each year until you reach your schemes retirement age.
Again, once you start receiving payments, payments from the pension you built up after 5 April 1997 will rise in line with inflation each year, subject to a maximum of 2.5%.
Payments relating to service before that date will not increase.
Will my pension be capped in the Protection Fund?
There is a 'compensation cap' that limits the amount of pension you can get from the Pension Protection Fund annually.
From 1 April 2020, the compensation cap at age 65 is £41,461. The cap is lower if you retire earlier and rises above age 65 for those drawing their pension later.
If you haven't retired yet, the cap is £37,315 (which is 90% of the full compensation cap).
The table below shows the compensation cap and what percentage of it you get (technically called the 'factor') at different ages. We've rounded up the percentages for clarity.
(at your last birthday)
|Percentage of the |
compensation cap you get
|The total pension |
you'll get each year
There is also now an 'enhanced' long-service cap for people who have 21 or more years' service in their pension scheme.
The cap is increased by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
What if my company went bust before April 2005?
The Pension Protection Fund only applies to companies and employers that went bust on or after 6 April 2005.
Prior to that, the Financial Assistance Scheme was introduced to cover the pensions in companies that went bust between 6 April 1997 and 5 April 2005. Similar to the Pension Protection Fund, it pays out 90% of the benefits you would have received, and a cap of £33,454 a year applies.
For employers that went bust prior to that, there was no formal protection scheme in place. Trustees - a group that manages a pension scheme - were legally obliged to transfer the pension benefits to an insurance company through a 'buy-out'.
There was no legal obligation to do so before April 1997. So if you have a pension in a company that went bust prior to that, you may have lost some or all of your pension.
You can track down old pensions using the government's pension tracing service, to find out which insurer took over your company's pension.
If that doesn't yield any results, you could use Companies House to find the contact details of the administrator or the insolvency practitioner that dealt with the winding up of the company to see if they have any records on what happened to the pension.
Does the Protection Fund cover defined contribution pension?
No. This is because defined contribution and money purchase schemes - which see you pension savings invested on the stock market to grow in a big pot - aren't run by employers.
Instead, they are run by pension companies, usually insurers, which means your money is separate from your employer's finances.
Pension companies should 'ringfence' your pension savings from their own operations, which means that if they went bust, your pension is separated.
However, you can make a claim on the Financial Services Compensation Scheme if your pension company goes bust and is authorised by the City watchdog the Financial Conduct Authority.
What is the Fraud Compensation Fund?
If your employer went bust and the value of the pension fund has lost money because of dishonesty or fraud, there is a separate fund to pay compensation.
This is called the Fraud Compensation Fund. It covers most workplace defined benefit and defined contribution pension schemes (but not personal pensions or the state pension).
Pension Protection Fund: FAQ
Can you transfer out of a scheme that’s in the Pension Protection Fund?
No. You may look to transfer your company pension to cash in your final salary pension but this is prevented if it is in the fund.
The only way this could happen is if you made a request to do so, which was accepted in writing by your pension scheme and you had selected a new pension to place your money before your scheme applied for the Fund.
My scheme is in the Pension Protection Fund but I’m not drawing it yet. Will my compensation increase?
Compensation increases annually in line with inflation between the time your former employer went bust, and the date your pension comes into payment.
This annual increase is subject to a cap of 5% for the pension you built up prior to 6 April 2009, and a cap of 2.5% on pension you built up after 6 April 2009.
How will I know if my scheme is protected by the Pension Protection Fund?
Most defined benefit pension schemes are likely to be covered by the Fund. If you have a 'hybrid' pension, which is a mix of a defined benefit pension and defined contribution pension, the defined benefit part is covered.
How is the Pension Protection Fund funded?
Funding for the Pension Protection Fund is provided by a combination of:
- an annual levy on pension schemes
- the assets transferred to it from pension schemes it has taken over
- recovery of money from companies that have gone bust
- investment returns on assets it holds.
Can I take my pension early if it's in the Pension Protection Fun?
No, you'll have to wait until the pension scheme's 'normal' retirement age. It's usually between 60 and 65.