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If your company crashes, what happens to your pension? Find out if you are protected by a safety net – and what happened when MG Rover went under
Final salary schemes
Only last month, it emerged that more than 90% of the UK's final salary pension schemes now have insufficient assets to meet their pension promises. That means many will probably have to be bailed out by government's Pension Protection Fund (PPF), set up to protect employees if the companies running the schemes go bust. Only 9% of the almost 7,800 workplace schemes still have a surplus.
If you have already retired, the fund guarantees 100% of your pension payments, provided you have reached the scheme's normal pension age. The same generally applies to those who retired early on health grounds, and people receiving a pension in relation to someone who has died.
If you are still working, the PPF will pay out 90% of what you were entitled to, up to an overall cap which is recalculated each year and currently stands at £28,742 a year.
Some people have expressed concern that the PPF could be at risk of being overwhelmed as more firms go to the wall. Only a few days ago, the Guardian carried a report that stated that the fund was threatened by a collapsed telecoms company's £2bn pension deficit.
But a spokesman for the fund says it is designed to work in both a benign environment and a downturn, and points out that there are many workers whose schemes have transferred to the fund who are not due to receive payouts until they retire in perhaps 20 or 30 years' time. The PPF currently has about £3bn in assets and is paying out £4m a month (the average payout is £4,000 a year).
In recent years, a number of big-name employers have sold their final salary pension schemes to the new breed of "pension buyout" firms, which are usually insurers. This might not sound like great news. However, it can be argued that selling the scheme to an insurance company can provide members with greater security. These insurers are directly regulated by the Financial Services Authority.
If you work for the government, or a body backed by the state, you have little to worry about. Government pensions are paid out of tax money – there is no investment fund behind them, so there is nothing to fear, unless the government itself defaults.
Money purchase schemes
These are the most common pension schemes offered by companies today. The contributions from your salary (and those of your employer) are invested on your behalf by an insurance company or fund manager. How much pension you eventually get is not known in advance as it will depend on how well the investments perform and annuity rates at the time of retirement. "In that sense, the scheme can only have a shortfall where there has been fraud or theft. In such circumstances, it may be possible to recover some of the money through the Pension Protection Fund," the government's Direct.Gov website says. The PPF runs the Fraud Compensation Fund, which replaced the old Pensions Compensation Board.
Personal pensions
You are likely to have one of these if you are self-employed. As with money purchase workplace schemes, it is stockmarket volatility and rock-bottom annuity rates that are probably your biggest threats. However, if you are still quite a few years away from retirement, there is arguably plenty of time for stockmarkets to recover.
Millions of people's pension plans are provided by the leading insurers. Lately, some financial experts have expressed fears that the life insurance industry could become the next victim of the financial crisis. Last month, Legal & General announced it made a pretax loss of £1.49bn last year, while Norwich Union parent Aviva has seen its share price plummet.
These insurers tend to have huge amounts of surplus capital which should help them withstand even a nasty stockmarket slump. Also, some analysts reckon the government would not allow a big insurer to go under.
If your provider did go bust, the Financial Services Compensation Scheme would step in and pay 100% of the first £2,000 of any claim, plus 90% of the remainder, with no upper limit.
What happens when it all goes wrong? When the carmaker MG Rover went bust in 2005, workers faced the bleak prospect of no job and only a fraction of the pension they were promised.
More than 6,000 workers relied on a retirement scheme that was more than £100m in the red. The pension fund was a creditor of the business, but with mounting debts at Rover exceeding £1bn, there seemed little likelihood there would be any spare funds to safeguard pensions.
Then, in what was widely seen as a politically expedient move, the government came to the rescue with a lifeboat scheme, the PPF. From April 2005 all defined benefit occupational schemes (most tied to length of service and final salary) would be channelled into the scheme, rather than wound up.
Technically, the Rover scheme crashed too early to enter the PPF, but the dates were fudged and it became one of the first to enter the fund. The PPF now has more than 100 crashed company schemes under its umbrella and a long queue ready to join.
Under the PPF arrangements, the trustees of a pension fund tied to a crashed company must apply for protection. As a creditor of the collapsed employer, trustees often expect to top-up their assets with leftovers from the insolvency. Next, the PPF spends two years assessing the value of the fund's assets and liabilities before allowing it to join.
Politically, it has proved a huge success for the government. At a time when companies are going out of business at an increasing rate, it has in place a scheme to protect more than 12million people who, for at least some of their working life, have acquired guaranteed pension rights. Without the PPF, it is certain thousands of workers, who value their pensions almost more than they do their jobs, would be protesting outside No 10.
That was the case following the collapse of steel maker ASW, which went under at the beginning of the decade, long before ministers began preparing for a crisis in final salary schemes. Workers, who were resigned to losing their jobs, led a long campaign for safeguards and can be credited with helping to create the PPF. Eventually, a £400m scheme became a £2.9bn scheme and the problem, at least for ASW workers, went away.
But there are increasing misgivings about the mounting cost to employers of standing by the guarantees. Ostensibly, the PPF is an industry scheme that will look to employers to make up any shortfalls. However, the 7,000-odd private sector final salary schemes are more than £200bn in deficit and the PPF deficit is growing. Pension experts are increasingly concerned how confidence can be maintained in the new system without a government guarantee.
Ros Altmann, former adviser to No 10, says the situation is desperate. She, and others, argue the PPF is a sticking plaster that avoids a more fundamental look at retirement. It addresses the so-called* pension promises offered to a proportion of the workforce, but ignores that the rest have either little or no pension savings and will most likely rely on the state.
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