What happens if a salary related scheme has to wind up?

Winding up is the process of ending an occupational pension scheme. This may happen for a number of reasons depending on a scheme’s rules. For example:

• an employer may decide to stop contributing to a scheme;
• an employer may become insolvent and this may lead to the scheme being wound up; or
• the scheme’s trustees may decide to wind up the scheme.

When a salary-related scheme winds up, the trustees of the scheme have to try to pay what is owed to scheme members using the scheme’s current funds (or assets). Sometimes there may not be enough funds to do this.

When this happens any shortfall becomes a debt the employer owes the scheme. This allows trustees to take action to chase the debt. Regulations also make sure that assets are shared out as fairly as possible. Some unpaid contributions can be claimed when employers become insolvent. And, in certain circumstances, members may have some or all of their SERPS (State Earnings-Related Pension Scheme) or State Second Pension restored for the period they were contracted-out.

All of this helps to protect the pension that you have built up. But there is still a chance that you may get less than you expect if your salary-related scheme winds up.

That is why the Government has announced its plan to introduce a new Pension Protection Fund and a new pensions regulator. The Pension Protection Fund will pay compensation to scheme members when an employer becomes insolvent and there are not enough assets in the scheme to pay the Pension Protection Fund level of benefits. The Pension Protection Fund level of benefits is broadly equal to the amount of compensation that would be paid by the Pension Protection Fund. For most schemes this will be based on 100% of benefits to those over the scheme’s normal pension age and 90% of benefits to members below the scheme’s normal pension age. However, there will be a limit on the benefit that can be paid.

The new pensions regulator will focus on protecting the benefits of scheme members by concentrating on schemes if it considers that there is a high risk of fraud, poor management, or administration.

If you want to find out more about how your salary-related pension is protected during winding up, you can contact your scheme’s trustees. If you are in any doubt about your position, you can also contact an authorised financial adviser. But, remember, if you do see a financial adviser, you may have to pay for their advice.