There have been significant retail collapses in recent months. Among the biggest was the collapse of the retail empire Arcadia. The crumbling empires don’t only result in job losses, but thousands of shopworkers' pensions could lose value. What happens to your pension if a business falls apart?
The collapse of Arcadia recently made big headlines. In the midst of the immediate worries employees have over their jobs, many have started to fear for their pensions as well. Your employer makes pension contributions on your behalf. But when a company stops trading, these contributions also stop. The good news is that when a business fails, there is a system to protect pension payments. Pension Protection Fund (PPF) helps protect the majority of pensions.
Pension Protection Fund in a nutshell
PPF protects pension payments in situations where companies fail. It ensures employees don’t lose out entirely when businesses falter. When a business collapses and cannot make pension contributions anymore, the PPF steps in and continues those pension payments.
PPF only applies to defined benefit pensions. These are pensions with a pension promise. It means the employer has given a specific promise of how much your pension will be at retirement. The amount is based on either your final salary or an average of your salary throughout your career.
Arcadia used two defined pensions schemes, which should now go into the PPF.
Do you get the same pension?
Your pension payments should have protection because of the scheme. However, you might receive less than expected. How much the system covers depends on your situation.
You are already retired
If you are already retired, your pension payments can change depending on when you accrued your pension. You should get 100% of your pension payments. But might not have the same protection against inflation, meaning your pension payments won’t grow the same way each year.
Pensions built up before 1997 won’t increase in line with inflation. Older members or those who worked at these shops before 1997 won’t receive annual increases that they would have under normal circumstances.
If your pension is from a time after 1997, the payment increases are pegged to the rising cost of living as measured by inflation. However, the PPF uses the Consumer Price Index (CPI) measure of inflation. This is generally lower than the Retail Prices Index (RPI) measure of inflation. The majority of active pension schemes use RPI.
You aren’t yet retired
If you haven’t retired yet or you retired early, the PPF won’t pay your full pension. The system only covers 90% of the pension promise once you hit pension age. There is also a cap on how much you can receive each year. The limit for the age of 65 is currently £37,315 a year.
The cap means that you might receive far less than the promised 90%. On average, pensions administered by the PPF generate around 75% to 80% of your expected pension.
What if you don’t have a defined benefit pension?
It’s worth noting that many employers offer defined contribution pensions. Separate investment companies manage these pension pots.
You and your employer’s contributions build up the defined contribution pensions. You can also further grow them with investment returns and tax relief. Your employer may set up the pension for you, or you can arrange it yourself. The schemes typically invest in stocks and shares. When you reach pension age, the pension provider will offer you a pension income or annuity. You could cash out the pot at once as well.
The key to note here is that the PPF does not protect these pensions.
What to do if you’re worried about your pension?
If your employer has collapsed and you worry about your pension, contact your pension provider. If you are unsure about how to contact your pension provider, you can read our previous post on the Pension Tracing Scheme here.
You can also contact the PPF directly at 0345 646 0061. The lines are open Monday to Friday, from 9 am to 5 pm. Note that the PPF can also answer questions regarding pensions that are part of their scheme.