As governments across Europe and throughout North America begin the process of reopening their economies, businesses are getting ready to consider the “new normal.” Unfortunately for many, they cannot survive the economic impact of the coronavirus’s devastating toll, and they will go out of business. For UK pensioners on both sides of the Atlantic, this raises a new set of alarms as they emerge from lockdown conditions. Many are now left wondering, “what happens to my pension if my employer goes out of business?” If you too are wondering the same thing, here’s your answer.
The current crisis’ impact on pension benefits
The current crisis may have you wondering about the longevity of your pension scheme should your employer become insolvent. The crisis has changed a lot of things, but one thing that remains in place is the industry’s Pension Protection Fund (PPF). This is a government-run scheme that does just what the name implies: serves as a safety net for members of defined benefit (DB) schemes. These are often known as “final benefit schemes.” It’s funded by the Treasury, which means current market volatility does not affect its funding. They’ve also stated on their website that they will continue paying their members as usual, through the current COVID crisis.
Thanks to the PPF, if you are of retirement age and already drawing upon your pension, you will continue to receive your full pension, even if your employer goes out of business. Also, there is an assessment period during which the PPF works to determine whether your employer’s scheme meets the criteria for transfer to the PPF. According to the PPF, this takes an average of two years!
If you have not yet reached average pension age for your scheme, you are still in relatively good shape, with the PPF providing 90% of your full pension amount.
A few more things to note: the annual increases will be lower with the PPF than they would otherwise be. And good news for anyone taking advantage of the PPF starting after April 1, 2020: the annual cap increase did go into effect despite the COVID economy. The cap at age 65 is £41,461, up 3.6% from last year.
The PPF and pension transfers during COVID
Pensioners who are expecting a more substantial pension than the PPF cap may want to consider a pension transfer if they suspect that their employer is at risk of going out of business. The PPF is a safety net only as far as the cap allows. If your expected pension is any amount above and beyond the cap, you may see a reduction in your benefit should you eventually have to rely on the PPF for your pension.
Currently, however, a pension transfer out of your employer’s DB scheme might prove tricky. The governing body that regulates pension transfers has given trustees of over 5,000 pension schemes the right to suspend transfers for up to three months. They may also put a hold on requests for pension transfer quotes, for up to three months. The extra time gives the trustees a chance to review the cash equivalent transfer value terms in more detail while market volatility continues.
The good news? We don’t believe that all trustees will block all transfer activity. Some transfers may be delayed in the case of schemes that are not as well funded as others.
Have more questions about your pension or about an overseas pension transfer? Tim can help- drop us a line or call, and we’ll be sure to help you with all your pension transfer questions.