What happens to your pension if your employer becomes insolvent

If your employer is likely to become, or has become, insolvent you should find out the following information:-

• is there a risk that the scheme might be brought to an end ('wound up')
• what are the winding up provisions under the scheme's rules
• who is dealing with the winding up of the scheme
• in what order of priority will scheme liabilities be met if the scheme is to be wound up
• will any options be given to members about how their benefits will be guaranteed.

If the company either goes into voluntary liquidation or compulsory bankruptcy, there is some limited legal protection for the pension rights of all employees in the scheme.

The following are the basic rights:-

all contracted-out employees in a final salary scheme will be given benefits worth at least equal to the guaranteed minimum pension. This must then be transferred to another scheme or personal pension, or brought back into additional pension. If you are in a money purchase scheme, you will be entitled to some protected rights, that is, a minimum amount equivalent to additional pension. This must be transferred to another scheme or personal pension or brought into the state scheme. You may be able to claim any unpaid employer's contributions from the National Insurance Fund

• if the trust fund itself is being wound up, members may be offered the option of a transfer to another scheme or the purchase of an annuity. The employee would need to discuss the pros and cons of each with either her/his representatives or the trustees of the pension scheme
• if the trust is not being wound up, the employee will have the same rights as any other early leaver to opt for a preserved pension or a transfer - S/he would need to consult with the trade union or staff association representative, or the trustees of the pension scheme, before deciding on whether or not to opt for this choice.

From 12 November 1990, if an employer becomes insolvent and a final salary pension scheme is being wound up, an independent trustee must be appointed by the insolvency practitioner. In order to be independent, the trustee must not have provided services (or have been connected with a person providing services) to the employer or the pension scheme in the previous three years. The trustee will establish what money is available and work out members' entitlement to benefits.

It can take a long time for the finances of a firm to be sorted out when it goes into liquidation, possibly as long as three or four years. When this is the case, it is important for the employees to keep in touch with the scheme trustees, or whoever is doing the work on their behalf, for example, a bank, pension consultant or a pension fund manager. It is also important to make sure that the trustees know the employees' current addresses.

Particular difficulties can arise for an ex-employee with a preserved pension should her/his old employer becomes bankrupt. S/he should be notified of how much her/his pension is worth and how the benefit which has been preserved is to be treated. The money equivalent will usually either be used to buy an annuity from an insurance company (in which case the employee will be given the name of the insurance company), or transferred to another pension scheme, or used to pay a premium to additional pension to buy back the equivalent of the contracted-out element.

The information given here is meant to be a guide only. If you have any difficulty please ensure you seek independent advice as soon as possible.