Security of Pensions
The Pension Protection Fund was set up in April 2005 to protect your pension if your employer goes bust. Should your pension scheme no longer be able to afford to pay your promised pension, the Pension Protection Fund will intervene. This only applies to defined benefit pension schemes and not to defined contribution schemes.
The Financial Services Compensation Scheme (FSCS) is the UK’s statutory fund of last resort for customers of authorised financial services firms. The FSCS can generally pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading and has insufficient assets to meet claims, or is in insolvency.
Where you may hold a deposit, if the money is held in a provider’s client account with a Bank, the FSCS protection will protect you. Yet, there is some legal uncertainty as to whether the £50,000 limit applies to the whole account or to each individual. If this situation applies to you, you are advised to ask your provider to clarify the position in writing.
There will be some situations where this deposit is held in an account with the provider after the PPP provider is authorised by the FSA. There are two uncertainties about this situation. Firstly, it may be that this would be treated as an investment rather than a deposit and so the £48,000 limit will apply for firms that defaulted prior to the 1st of January 2010. In addition to this, the legal status of the account could result in a situation where the appropriate limit will apply to the account as a whole rather than to each individual within that account.
Occupational schemes usually fall into three categories, which are defined benefit schemes (also known as final salary schemes), defined contribution schemes (also known as money purchase schemes) and another scheme which is a mix of the two. The defined benefit schemes lie within the Pension Protection Fund. However, if money is invested in an insurance company and that company goes bust you will need to then make a claim to the FSCS. Yet, this will not affect your benefits from the scheme. This is done so that the member gets the benefits that can be provided by the members own account and the value of that account will rise and fall with the value of the investments. Protection will then only be available where there is an involvement by a company authorised by the FSA and therefore covered by the FSCS.
Defined Benefit Elements
Defined benefit elements ideally should qualify for the PPF, while the defined contribution element where appropriate should qualify for the FSCS compensation.
In addition to the funds that people set up to provide themselves with an income for when they retire, people also choose to pay extra money into their occupational pension scheme to provide extra benefits for when they retire. These are known as AVC’s. Yet, most of the time they are invested to create an additional pot of money at retirement from which additional benefits can be provided, regardless of whether the scheme is a defined benefit or a defined contribution scheme. The whole security of this type of scheme will depend on how it is invested.
Other Important Aspects
Other important aspects of security include unitised funds which are held under trust for the benefit of the investors; therefore they are not available to the creditors of the PPP provider and are not at risk by the provider going into liquidation or receivership.
Most of these funds are set up to invest in Shares, UK or overseas, and they will be hit by downturns in the relevant markets. So there is no real protection in the fall of value of your pension savings.
Qualify for Compensation
If the provider of your annuity were to go bust then you would qualify for compensation from the FSCS on the basis of the annuity being long term assurance.
Profit funds are only run by insurance companies; they are also covered by the FSCS and provide protection for 90% of the claim, with no upper limit. Share portfolios can only be found in SIPPS. The beneficial ownership of the shares lies with the trustees who hold them.
If you are worried about the safety of your fund you should contact your provider, who should provide you with written clarification, or an IFA, who will be able to analyse your personal situation and advise accordingly.