We take a look at how your pension will be affected if your employer goes bust
The growing coronavirus pandemic means thousands of businesses across Britain could go bust in the coming months.
With people staying in to self-isolate, small businesses face a fight for survival, while many pubs and restaurants are likely to go under.
The airline industry also faces collapse, and bosses have warned that some firms may not survive unless the government bails them out.
Millions of people face an uncertain future and could potentially lose their jobs, but what does this mean for their pensions?
Defined Benefit pension schemes
Defined Benefit (DB) pension schemes – sometimes called a final salary scheme - pay out a guaranteed income for life.
The amount they pay is linked to the number of years the recipient worked for a particular employer or the amount they earned.
The good news for people with a DB scheme is that they will be protected by the safety net of the Pension Protection Fund (PPF) if the company they work for enters insolvency.
When a firm goes bust the PPF steps in to protect the pensions of employees. The assessment process usually lasts between 12 to 24 months.
Those who are officially retired or who have passed the retirement age will continue to receive their pension payment in full.
However, those who are not retired or retired early will lose around 10% of their pension.
They will also be subject to an annual cap set by the government.
This is currently £40,020 for those aged over 65 and £36,018 for those who have not retired yet.
A PPF spokesperson told Moneywise that even if there is a dramatic rise in firms going bankrupt it will be able to cope.
The spokesperson says: “While the current market turmoil is highly challenging, we remain confident our sustainable funding strategy and diverse investment approach ensures we are well equipped to weather the current market volatility and future challenges.
“Our members, and those in schemes protected by the PPF should be reassured that we are well placed to provide compensation for as long as they need it."
Defined Contribution pension schemes
Defined Contribution (DC) pensions build up a pot with contributions from you and your employer which are then invested to give you a return when you retire.
The income you might get from a DC scheme depends on the amount you pay in, the fund’s investment performance and the choices you make at retirement.
Unlike DB schemes they are not automatically covered by the PPF.
However, you should not be worried about losing your pension pot if your employer goes out of business.
This is because DC pensions are usually run by pension providers, not employers.
Steve Cameron, Aegon pensions director, says: “The vast majority of DC pensions are run by third-party pensions providers and they are subject to stringent regulation to make sure that money paid into the scheme on behalf of members is protected.
“The money is paid into separate pension scheme that the employer does not have access to.
“Even if the employer goes under goes under the money will still be there, so employees have substantial protection.”
However, while there is this protection, many pensions will have suffered significant losses over the last few weeks as stock markets around the globe have fallen.
For many people when they retire the state pension is an important form of income.
State pensions are paid for by the government through National Insurance contributions, unlike DC and DB pensions where these payments go into a fund.
This means the coronavirus pandemic will not affect your state pension, which is guaranteed for life.
What if your employer has cashflow problems?
Many of the UK's leading companies have large pension fund deficits and are facing further difficulty in paying them because of the coronavirus outbreak hitting profits.
Some companies and pension funds are currently talking about rescheduling planned payments into company pension funds.
Moneywise understands that the Pensions Regulator is now starting to have conversations with schemes about whether this will be allowed.
If a company has temporary cash flow problems, pensions will continue to be paid as the pension fund is legally separate to the rest of a company's accounts. This means if turnover is down for your employer you will not suddenly be left without a pension.
Bob Scott, senior partner at financial consultants Lane, Clark and Peacock, says: “Pension scheme members can be assured that employers cannot simply walk away from pension promises when times are tough, and in the vast majority of cases there is no sign of any interruption to payment of current pensions.
“But the Pensions Regulator has to strike a balance between getting pension scheme deficits tackled swiftly and not pushing so hard as to jeopardise the long-term future of the employer. It may be that firms facing particular cash-flow challenges in these extraordinary times will be looking for some delay in making planned contributions to their pension scheme.
“But trustees and regulators will seek to ensure that firms explore other avenues to help with cashflow, including reviewing dividend levels and executive bonus payments as well as taking up government offers of help.”