Pension protection limits

Sahara20

Obviously aware of the £85K protection limit per savings, however I naively thought pensions were protected if the pension provider (not former employer) ceased trading.

Recently read an article saying that is not the case. Please can anyone simplify what is and what isn't protected re pensions? 

El_Torro

If the pension provider ceases trading your investments will be sold on to another pension provider. So yes, they're safe. Of course if the companies that your pension is invested in go bust then your shares are worthless regardless of what happens to the pension provider.

If you have a DB pension or annuity then this is protected by the FSCS. 

Sahara20

Thanks.  The particular pot I am referring to I have taken TFLS and the rest is in drawdown but has not been touched,  it is now a SIPP.  Does that change things?

gm0

A single limit of 85k applies for a SIPP platform.  This is the FSCS underpin.  If *two* things were to happen

1. Company and platform failure (of the SIPP provider)
2. Failure of the custody arrangements for your investments (fund units) - also failed.

In most circumstances where item 1 occurred you would regain access to your money later.
After a process where the holdings are moved to a new provider such as after an insolvency

It is hard to construct the data corruption/fraud/corruption/IT failure scenario that achieves this.  It is also impossible to entirely rule it out as "impossible"

This is the normal arrangement for what are called "uninsured" funds.

There is a category of "insured funds" which are often used by occupational and trust based pensions.  These enjoy 100% fund value FSCS protection

In reality both of the protection regimens are a "long shot" scenario.  And because the amount of money involved in such a long shot ever happening are ££££  and the legal trust basis is complex and old drafting.  Lawsuits about who catches liability - insurers, govenment underpin etc.  Can be expected should it ever occur.  See also Equitable Life
This legal uncertainty will remain untouched until tested - by a disaster.

Marcon

El_Torro said:

If the pension provider ceases trading your investments will be sold on to another pension provider. So yes, they're safe. Of course if the companies that your pension is invested in go bust then your shares are worthless regardless of what happens to the pension provider.

If you have a DB pension or annuity then this is protected by the FSCS. 

No it isn't. The FSCS doesn't protection an occupational scheme if it fails:

https://www.fscs.org.uk/what-we-cover/pensions/ and see

Pension provider failures

gm0

DB pensions are protected by the Pension Protection Fund. PPF.   The pension.  Not a notional equivalent pot value.

The "shorthand" rule of thumb on that is between full and 90% underpin of the pension in payment.   But the failed scheme may have had special terms e.g. around indexation.  And those will lapse.  Replaced by the PPF ones.

So as with all things pensions it's complicated due to the varied ages and types of historic products, trusts and schemes.  Historically there was a difference between pensioners already in payment.  And younger people accumulating service credits / deferred ex employees.  I am not up to date on the details. 

Separate regimen altogether.

Sahara20

I also have a modest DB pension (untaken).  Is there something people can do to protect there pensions?  How do fellow members address this issue?

hugheskevi

Sahara20 said:

I also have a modest DB pension (untaken).  Is there something people can do to protect there pensions?  How do fellow members address this issue?

A loss will only occur if both the pension scheme is underfunded and the sponsoring employer fails. So it would be essential to review the funding of the scheme and the employer solvency before considering taking any action.

In practical terms, there is little an individual can do other than to ensure they limit the amount of their wealth exposed to the company - eg selling shares they may hold in it which are not benefitting from a tax or other advantage.

They could choose to work elsewhere given they would be likely to lose their job if the employer were to wind-up, which would diversify risk a little.

It would also be possible to transfer the pension, either to a DC pension where they would be exposed to different types of risk, but ones which are more manageable, or even to take a public sector job and transfer to a public service pension scheme which is underwritten by the Exchequer. Both of these are likely to be difficult and burdensome however.

Sahara20

Thanks. Are others worried about pensions over £85k in a SIPP?   Is that the riskiest.

gm0

As discussed above.  It is barely risky at all. 

This is due to the way fund holdings are separated from the operating company and it's assets.  And the stockmarket custodian arrangements for market traded instruments.  Which make it a lot harder (not impossible but a *lot* harder) for the operating company to go rogue.

The crypto setup Sam BankmanF did with FTX and the related consulting and trading company exchanging "real" (ish) assets for made up one of their own devising. Would be much harder to construct with listed funds and equities and public companies (and their accounting and disclosure).  

Nonetheless what the global financial crisis of 2007/8 teaches us is that the pursuit of profit in capital markets and the slicing and dicing and reselling of risk and leveraging up - can lead to large, complex and unexpected consequences. When counterparties vaporise, or by legislative fiat - do not honour - overseas investor exposure.

Not very risky is not the same as "No risk at all" and will stay still. 

But this all very much needs to be kept in proportion.

My own take on this is that there is a carried complexity to doing anything about the 85k limit.  I have three pension segments.  2 SIPP. One occupational.  1/3 @ 100%.  And 2/3 with 2x 85k.  This leaves me with a very low probability of loss on a still quite material % of my total pension. 

So the benefit of doing it the way I do it - is more to do with "not losing access" to my pension for a period of IT and commercial disruption in case of a single provder failure.  Than the protection difference.

If your personal arrangements, types of investments, preferred use of platforms allow hedging of this issue en passant. Fair enough.  And if you want to simplify and have one consolidated pension with 85k protection.  Then most people will sleep happily enough with that arrangement also. 

Albermarle

Sahara20 said:

Thanks. Are others worried about pensions over £85k in a SIPP?   Is that the riskiest.

There are many on this forum who have pensions worth Hundreds of Thousands of Pounds with one provider, with no worries. ( apart from of course the stock market taking a plunge !)
As long as it is mainstream provider with regulated investments, the risk is negligible.