What Happens to Company Pensions During Insolvency?
When a company enters financial difficulty, directors are often concerned about what will happen to workplace pensions.
Employees may worry that their pension savings will disappear, while directors may be unsure whether pension funds can be used to pay creditors or whether the company remains responsible for missed contributions.
In most cases, pension savings are kept separately from the company’s own money. However, the position depends on the type of pension scheme in place, whether contributions are outstanding and whether the company sponsors a defined benefit scheme.
Understanding these differences can help directors communicate clearly with employees and ensure the correct steps are taken during the insolvency process.
Are pension savings used to pay company debts?
Pension funds do not usually form part of the company’s assets.
Money that has already been paid into a workplace pension scheme is generally held separately from the employer and is not normally available to the company’s creditors. This means that liquidation, administration or another insolvency procedure should not result in employees losing the pension savings already held on their behalf.
There may be exceptional circumstances in which an insolvency practitioner investigates payments involving a pension scheme, such as a transaction at an undervalue or a preference. However, this is different from pension funds automatically becoming available to repay ordinary company debts.
The main concerns are therefore usually the type of scheme involved and whether the employer has paid all contributions that were due before the insolvency.
What type of pension scheme does the company operate?
Most workplace pensions fall into one of two categories:
- defined contribution pensions
- defined benefit pensions
The protection available and the steps taken after insolvency differ significantly between the two.
What happens to a defined contribution pension?
Defined contribution schemes are the most common type of workplace pension.
Under this arrangement, contributions made by the employee and employer are paid into an individual pension pot. The money is then invested, and the eventual value of the pension depends on factors including the amount contributed and how the investments perform.
If the employer becomes insolvent, money already held within the scheme will usually remain protected because it is kept separately from the company’s finances.
The pension provider will continue to manage the funds already paid in, although contributions from the insolvent employer will normally stop.
Employees will generally be able to leave the pension where it is until they are ready to access it. They may also have the option of transferring it to another pension arrangement, such as a new employer’s workplace scheme or a personal pension.
The most appropriate option will depend on the individual’s circumstances, including pension charges, investment choices and the benefits offered by each scheme.
What happens if pension contributions are missing?
A company experiencing cash-flow difficulties may fall behind with its pension payments before entering insolvency.
This can include employer contributions that should have been made, as well as employee contributions that were deducted from wages but not transferred to the pension scheme.
Employees should check their pension statements and compare them against their payslips to confirm whether contributions were made correctly.
Where eligible pension contributions remain unpaid, it may be possible for the pension scheme or its provider to recover money from the National Insurance Fund. The available claim will depend on the circumstances and when the contributions became due.
Older outstanding amounts may need to be addressed through the insolvency process and should be raised with the insolvency practitioner dealing with the company.
Directors should ensure that payroll records, pension schedules and details of payments made to the scheme are complete and available. Clear records will help the insolvency practitioner and pension provider identify any shortfall.
What happens to a defined benefit pension?
Defined benefit schemes operate differently.
Rather than building an individual pension pot, these schemes promise members a particular level of income in retirement. The amount is usually calculated using factors such as salary and length of service.
The sponsoring employer is responsible for supporting the scheme and ensuring it has sufficient funding to meet the benefits promised to members.
This creates a greater level of complexity when the employer becomes insolvent.
Defined benefit schemes may be underfunded and reliant on the employer making additional payments over time. Once the employer enters insolvency, it may no longer be able to make those payments.
The Pension Protection Fund may then become involved.
What is the Pension Protection Fund?
The Pension Protection Fund was established to protect members of eligible defined benefit pension schemes where the sponsoring employer becomes insolvent and the scheme does not have enough money to provide the promised benefits.
Following the employer’s insolvency, the scheme may enter a formal assessment period.
During this process, the Pension Protection Fund, scheme trustees and other parties will review the scheme’s records, assets and liabilities. A valuation will be carried out to determine whether the scheme has enough assets to secure benefits at the required level.
This assessment can take a considerable amount of time and may last around two years.
Not every defined benefit scheme will ultimately transfer to the Pension Protection Fund. If the scheme has sufficient assets to secure better benefits through an insurance company, another arrangement may be put in place instead.
Will members receive their full pension?
The level of protection will depend on the member’s circumstances when the employer becomes insolvent.
People who have already reached the scheme’s normal retirement age will generally receive full compensation for the pension they were receiving at that point.
This level of protection may also apply to those who retired because of ill health and people receiving certain survivor’s pensions following the death of a scheme member.
Other members will generally receive 90% of the benefits promised by the scheme.
Although this provides an important safety net, the compensation may still be lower than the amount the individual originally expected to receive under the pension scheme.
Members should contact the scheme trustees during the assessment period if they need information about their expected benefits or the progress of the process.
What happens to directors’ pensions?
Directors who are members of the company’s pension scheme are generally protected under the same principles as employees.
Money already held in a defined contribution pension will normally remain separate from the company and protected from creditors.
A director who is a member of a defined benefit scheme may also be eligible for protection through the Pension Protection Fund, depending on the scheme and the director’s circumstances.
However, directors may have additional considerations, particularly where their pension arrangements involve salary sacrifice, larger contributions or another individual arrangement.
Accurate records are especially important. Any unusual pension payments made while the company was already experiencing financial difficulty may be reviewed as part of the insolvency practitioner’s examination of the company’s affairs.
What responsibilities do directors have?
Directors should not assume that pension matters can be left entirely to the scheme provider.
Once insolvency becomes likely, they should ensure that information about the company’s pension arrangements is complete and readily available.
This may include:
- details of the pension provider and scheme
- employee and employer contribution records
- outstanding contribution schedules
- payroll information
- correspondence with pension trustees or administrators
- details of any defined benefit funding arrangements
An insolvency practitioner appointed over the company will need to notify relevant organisations, which may include The Pensions Regulator, the Pension Protection Fund and the scheme’s trustees or managers.
Directors should also communicate carefully with employees. Staff may understandably fear that they have lost their pension savings, so clear and factual information can provide reassurance and help them understand what happens next.
Seeking advice at an early stage
Pension issues can become particularly complicated where contributions are overdue or the company operates a defined benefit scheme.
Obtaining advice before the company’s position deteriorates further may give directors more time to review the records, identify missing contributions and understand their responsibilities.
Bretts Business Recovery supports directors through periods of financial pressure and formal insolvency. We can review the company’s position, explain the available options and help ensure pension matters are dealt with properly as part of the wider process.
If your company is struggling to meet its obligations, including employee wages or pension contributions, early advice can help you take the right steps and avoid making the situation more difficult.