Credit Crunch threat to pensions

foggytown

I never used to worry about the safety of my pensions. But now seems like a good time to start! The question is this : in GENERAL terms, if a scheme gets into serious trouble, are members who are already collecting their pension in a more secure position that those who have yet to begin collecting (i.e. have not yet retired)?

MrChips

Assuming you are talking about a defined benefit scheme, a slightly simplified version or what happens is below...

If the employer remains solvent, then the scheme carries on as before and the employer continues to pay the necessary contributions, including those the Trustees deem necessary to remove any deficit.

If the employer becomes insolvent and there is enough money in the fund to buy all members benefits through an insurance company (unlikely) then this is what will happen and all benefits accrued to that point are safe.

If the employer becomes insolvent and there is not enough money to buy everyone's benefits in full, but there is enough to buy more than would be payable by the PPF, then everyone has their benefits bought out at 100% of PPF level, and any remaining money is shared amongst members so that each can buy the same percentage (less than 100%) of their remaining benefits.

If there is less than 100% of the money needed to buy PPF benefits, the scheme goes into the PPF. Persons over the scheme's retirement age (and members receiving dependant's pensions or ill health pensions) get 100% of their pension but with future increases scaled back to a minimum level. Persons who have not yet reached the retirement age get 90% of their benefits subject to a cap (currently about £27k pa), again with future increases scaled back.

So those who have already retired are in a slightly stronger position (assuming they have reached their retirement age, and haven't jumped the queue by retiring early).

foggytown

Yes, I see. Thank you for your reply. But I am wondering what would happen if the pension is through an insurer (like Scottish Widows) and the insurer goes bust?

dunstonh

But I am wondering what would happen if the pension is through an insurer (like Scottish Widows) and the insurer goes bust?

The first £2000 has 100% protection and the rest has 90% with no upper limit. However, if unit linked, you will find most are ring fenced away from the insurer and in trust so its a non-issue (as the insurer cannot use those assets in the pension for itself). Conventional with profits funds are not ring fenced.

Insurers also not at as high a risk of failure as the banks are. They have suffered of course but not to the same degree. This is why coverage of pensions and investment tax wrappers hasnt been hardly mentioned in the media.

MrChips

What exactly do you mean? Do you mean if you have an annuity in payment, or you invest in their unit linked funds, or you hold a with-profits fund?

EdInvestor

http://www.pensionsadvisoryservice.org.uk/miscellaneous/security_of_pensions/