Commercial Law

Losing the Lot - How Does Company Insolvency Affect Pensions?

When British Home Stores (BHS) collapsed in April 2016, it cost the jobs of 11,000 employees and left thousands of former employees not knowing if the pension they paid into for years would reap any return. It was estimated it would cost £571 million to make up the shortfall in the pension scheme. Following a massive public backlash, including being labelled “Sir Shifty” by the Daily Mail, Sir Philip Green, a former owner of BHS (but not the owner when it fell into administration) injected £363 million into the pension fund to help plug the shortfall.

Many employees of private companies who are relying on a company pension being paid out may be wondering what protections are in place if an organisation goes bust.  

If a business goes into insolvency, does the pension scheme form part of the assets of the company?

Not automatically, which is good news for the beneficiaries of the fund.  If an insolvent company does have a pension fund, the insolvency practitioner (IP) must immediately inform:

  • the Pensions Regulator
  • the Pension Protection Fund ('PPF'), and
  • the trustees or managers of the scheme

The IP also has a duty to keep the trustees of the pension fully informed regarding any developments during the insolvency process which may affect the pension fund.

What is the role of the Pensions Regulator if a company becomes insolvent?

When a company with a pension fund becomes insolvent, the Pensions Regulator has the power to appoint an independent trustee.  This is a discretionary power which may not be used in every case.

What is the PPF’s role?

The PPF is akin to an insurance scheme.  It was developed thanks to lobbying by trade unions after many employees of companies going bust were left with little or no pension, through no fault of their own.

If you are in a salary-related pension scheme and the company you work for becomes insolvent, the PPF will mobilise to ensure your pension can be paid.

How is the PPF funded?

All employers who operate a company pension scheme now pay a levy to the PPF.

How does the PPF pay your pensions?

If you are currently receiving a pension, the PPF will continue to pay the amount you currently receive.  Compensation payments will generally rise 2.5% per year, in line with inflation but this only applies to pensions dating back to 5th April 1997.  The amount of your pension accrued after this date will not increase with inflation.

What if I was under 65 years when the company went bust?

If you were not receiving your pension when the business you worked for fell into insolvency, the PPF will pay you up to 90% of what you would have received had the company continued to trade.  This will be capped at £33,000 per year.

To find out more about your rights if your employer becomes insolvent, you can find an experienced insolvency lawyer in your area on Solicitors Guru.

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