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Answering employees’ questions: ‘is my pension protected?’

Following recent news headlines of high profile pension schemes running into difficulty, more people are looking into the safety of their current or previous workplace pensions and may ask their employers for information. It’s important that employees can make informed decisions about whether and how much to save and they shouldn’t be put off by misconceptions.

The difficulties that get the headlines usually occur when an employer running a defined benefit pension scheme runs into financial problems and is unable to fulfil their scheme funding obligations. However, financial protection is often in place and, if it is, employees will still receive their pension even if a company fails.

Understanding if they have protection

The protection depends on the type of workplace pension they have. Your company may run a defined contribution scheme, a defined benefit scheme or both. Employees could have a number of either kind from previous jobs. They don’t need to be pension experts, but a basic understanding of what types they have will help them understand the relevant protection.

When they have savings in a defined contribution scheme, it’s important for them to know that contributions (from themselves, their employers and the Government) are paid into a policy in their own name. The policy is held by a pension provider, such as Scottish Widows, and the money is invested with the aim of growing their savings for retirement.

In the case of defined benefit pensions, there isn’t a pot of money in their own name, but their employer guarantees a certain level of income in retirement, based on the employee’s length of service and either final salary or average earnings.

Protection of defined contribution pensions

Because these pensions are held by a pension provider, once contributions are paid in they are independent of employers. Therefore, employees wouldn’t lose their pension savings if an employer went out of business.

If their pension provider is authorised by the Financial Conduct Authority (FCA), as Scottish Widows is, their pension is protected by the Financial Services Compensation Scheme (FSCS). That means if the pension provider went bust, their pension would be protected in full with no cap on the compensation.

You can find more information on the FSCS website.

Protection of defined benefit pensions

Here, the employer has a responsibility to pay their employees an income when they retire. If that employer goes out of business and there isn’t enough money in the scheme, employees are protected by the Pension Protection Fund (PPF).

The exact amount of protection provided by the PPF depends upon the employees’ individual circumstances and caps that may apply.

You can find more information on the PPF website.

Information correct as at July 2018.

For Employer use only.