This page explains the complex
pattern of protection that exists for pensions and other types of
investment.
Pension Protection Fund (PPF)
The Pension Protection Fund (PPF) was set up in April 2005 to
protect you if your employer goes bust and its pension scheme can
no longer afford to pay you your promised pension. This only
applies to defined benefit pension
schemes and not to defined
contribution schemes.
Click here to read about the PPF in
more detail.
Financial Services Compensation Scheme (FSCS)
The Financial Services Compensation Scheme (FSCS) is the UK's
statutory fund of last resort for customers of authorised financial
services firms. This means that FSCS can pay compensation if a firm
is unable, or likely to be unable, to pay claims against it. This
will generally be because it has stopped trading and has
insufficient assets to meet claims, or is in insolvency.
Click here to read
more about the FSCS.
Personal Pension Plans (PPPs)
Personal Pension Plans
include Stakeholder Schemes and Self Invested Personal
Pensions (SIPPs). All PPPs are operated by companies which are
authorised by the financial regulator, the FSA. These normally are
insurance companies and investment houses. In the case of SIPPs,
some of these are operated by firms of Independent Financial
Advisers (IFAs).
If one of the plan providers were to go into liquidation, the
level of protection for the pension plan member depends on the
nature of their investment.
Unitised Funds (except Unitised With-Profit Funds)
These funds are held under trust for the benefit of the
investors, the unit holders. They are therefore not available to
the creditors of the PPP provider and are not at risk by the
provider going into liquidation or receivership. The nature of most
of these Funds is that they are invested in Shares, UK or overseas,
and they will be hit by downturns in the relevant markets. There is
no protection against this type of fall in the value of your
pension saving.
With Profit Funds (Unitised or otherwise)
These funds are only run by insurance companies. They are
covered by the FSCS under the long-term insurance category. The
FSCS provide protection for 90% of the claim, with no upper limit
(unlike other types of products, such as bank accounts, which are
only covered up to a set limit).
Share portfolios
This would only be found in SIPPs. The beneficial ownership of
the shares lies with the trustees who hold them, in trust, for the
SIPP member. As such, if the SIPP provider were to go into
liquidation, these assets are not available to the creditors of the
provider and so the questions of loss and compensation should not
arise.
Such investments are of course vulnerable to loss due to falls
in the stock market. Individual shares can also become worthless
because the company concerned has failed. There is no compensation
to cover either of these situations.
Deposits
This is a more complicated situation due to the variation of
practice by different providers. If the cash is held in a Bank in
an account in the name to the individual plan (this is only likely
to apply to a SIPP), the FSCS protection up to £50,000 will
apply.
If the money is held in a provider's client account with a Bank,
the FSCS protection comes into play. However, there is some legal
uncertainty as to whether the £50,000 limit applies to the
whole account or to each individual. If this situation applies to
you, you had best ask your provider in writing to clarify the
position in writing.
Finally, there will be situations where the deposit is held in
an account with the provider. In this situation the FSCS protection
will also apply, provided the PPP provider is authorised by the FSA
which it ought to be (you must check if you are unsure about this).
There are 2 uncertainties about this situation. (1) It is possible
that this will be treated as an investment rather than a deposit
and so the £48,000 limit will apply for firms that defaulted
prior to the 1st of January 2010 (note that for firms who went into
default on or after the 1st of January 2010 the investment limit is
being set to £50,000 - the same as deposits - and so this
point will be moot in these circumstances). (2) Also the legal
status of the account could result in a situation where the
appropriate limit will apply to the the account as a whole rather
than to each individual within the account. Given the uncertainties
involved you must clarify the situation which applies to you with
your provider.
We strongly advise that all queries of this
nature be made in writing. We ourselves have found that making such
enquiries by telephone can result in inconsistent, confusing and
inaccurate advice.
Annuities
If the provider of your annuity were to go bust, you will
qualify for compensation from the FSCS on the basis of the annuity
being Long Term Assurance. The level of protection is unlimited and
is calculated as 90% of the claim. The claim would be based on
the value of the annuity and should include the level of spouse's
benefits, inflation cover and other features that you have built
into the annuity.
Occupational Schemes
These fall into 3 categories - defined benefit schemes (also
often known as final salary schemes), defined contribution schemes
(often called money purchase schemes) and schemes which are some
sort of mixture of the other 2 categories (usually referred to as
hybrid schemes)
Defined Benefit Schemes
The protection for these schemes lies with the Pension Protection Fund (PPF),
referred to above. However, protection only becomes applicable if
your employer goes bust.
If monies are invested with an institution that goes bust, such
as a bank or insurance company, the scheme trustees will need to
make a claim to the FSCS. This will not affect your benefits from
the scheme.
Defined Contribution Schemes
The nature of these schemes is that the member gets the benefits
that can be provided by the money in the member's own account. The
value of that account will rise and fall with the value of the
investments.
Protection will only come into play where there is an
involvement by a company authorised by the FSA and therefore covered
by the FSCS. The extent
of any protection will depend on the nature of the investment
involved and will be treated in the same way as detailed above for
PPPs. If you are unsure about your own situation you should seek
clarification from the trustees. Again we strongly advise that this
be done in writing.
Hybrid Schemes
The defined benefit element should be treated as above and
qualify for the PPF while the defined
contribution element should qualify, where appropriate for the FSCS
compensation. However, the way these schemes are constituted varies
and it is best to get confirmation from the trustees if you have
concerns.
Additional Voluntary Contributions (AVCs)
Many members pay extra money into their occupational pension
scheme to provide additional benefits when they retire. These
contributions are known as AVCs. Sometimes they are used to buy
additional service in the scheme and have the same security that
applies to other benefits under a defined benefit scheme.
More often, they are invested to make available an additional
pot of money at retirement from which additional benefits can be
provided. Regardless whether the scheme is a defined benefit or a
defined contribution scheme, the security of this type of AVC will
depend on how it is invested.
The particular area of concern is where the Trustees offer a
cash deposit investment which is held in an account with a bank or
building society. Because it is a single account (not separate
accounts for each investor), the £50000 limit on compensation
for deposits will apply to the account as a whole and not to each
members individual account. This means that if the total amount in
the account was £200000, compensation in the event that the
deposit operator went bust (a very remote possibility), would be
limited to £50000, resulting in each member's account being
reduced by 75%. So, in this example, someone with £10000
invested, who would be unaffected if they had their own account,
will find their investment reduced to £2500 due to being
aggregated with other investors.
