I have two defined benefit pensions from past employment and also pension savings with three defined contribution schemes, set up by past employers, though I am still contributing to one of them.
The DB schemes seem fine, as the Pension Protection Fund seems to cover them. However the same cannot be said for the DC schemes.
The FSCS has a ‘pension protection checker’, which when I tell it that I have money in a scheme, that it is a DC scheme and that I didn’t use an independent financial adviser tells me that: ‘Your defined contribution workplace pension could be set up to be trust-based, contract-based, or group-based.
‘FSCS protection would depend on how your particular scheme was set up. It’s up to you to find out what protection your pension has.’
Even if I do find out whether my pension is “trust-based, contract-based, or group-based”, the website is silent as to what the consequences of this might be. In short, this is useless.
Elsewhere on the FSCS site, it says that: ‘If your pension provider or financial adviser goes out of business, we may be able to step in and pay compensation.
Got a question for Steve Webb? Scroll down to find out how to contact him
‘But FSCS protection varies depending on the type of pension product, and there are limits to the amount we can compensate.’
However this is directly contradicted by moneyhelper.org.uk, which says that: ‘If something happened to an investment provider, you would normally be able to apply for compensation from the Financial Services Compensation Scheme (FSCS).
‘Generally, this means you’re protected up to £85,000 for each institution your money is invested. This includes money you’ve invested in your pension as well as any other savings accounts. It also includes money you have in cash with the same institution such as a bank account.’
Many people have more than £85,000 in DC pension funds, so this is a very relevant distinction. It might also be of particular significance given the advice that is often seen to consolidate one’s employment pensions into a single scheme.
If there is an £85,000 limit on compensation per provider, this would seem to be very foolish. Is there any way you might be able to provide some clarity?
SCROLL DOWN TO FIND OUT HOW TO ASK STEVE YOUR PENSION QUESTION
Steve Webb replies: It is important that people understand how safe their money is, whether it’s invested in a pension or some other financial product.
As you say, this may become particularly important if more and more people decide in future to consolidate all their pension savings in one place.
However, as you have discovered, the rules around pensions are far from straightforward.
In this column I’ll do my best to set out what protections are in place, but (spoiler alert) the answer may in some cases still be ‘it depends’ on the specific situation.
As you know, things are relatively clear cut in the case of a traditional defined benefit (DB) pension.
How safe are your pensions? The rules around this are far from straightforward, says Steve Webb
When a private sector employer stands behind a DB pension, they are required to pay a levy to the Pension Protection Fund.
In the event that the company goes bust and there is not enough money in the pension fund, the PPF will step in and cover a significant proportion of what was due.
You can read more about the scope of Pension Protection Fund protection here.
In the case of more modern ‘pot of money’ or defined contribution (DC) pensions, the situation is more complex.
This is primarily because DC pensions can be set up in a variety of ways and the way compensation is structured depends on exactly how the pension was established and on how the failure arose.
To try to obtain greater clarity, I have been in touch with the Financial Services Compensation Scheme, which is likely to be the main organisation involved in providing compensation in the case of DC pensions, and it has expanded a bit more on the information on its website.
Before going further, I should say that FSCS was at pains to stress that the precise answer will always depend on the exact details of the exact pension arrangement, and so what follows is only intended as a rough guide rather than a definitive statement of the law.
One group of DC pensions are those provided by insurance companies, many of which are household names.
If your pension is a ‘contract of long term insurance’ with a regulated UK insurer and the insurer fails, FSCS may be able to protect it at 100 per cent under something called their ‘insurance sub-scheme’.
FSCS also have an ‘investments sub-scheme’ which could cover a situation where a provider of self-invested personal pensions (Sipps) fails.
In this case, for failures since 1 April 2019, cover may be available up to £85,000.
The requirement in this case is that the Sipp firm would have to owe the customer a civil liability – something the customer could have sued the firm for, such as a failure to conduct proper investment due diligence.
A slightly different cause of ‘failure’ to pay your full DC pension could arise if an underlying investment provider of an asset held within a pension were to fail.
As you will appreciate, the money inside a pension is likely to be invested across a range of assets and a range of providers.
FSCS says that in cases where the pension is something called a ‘bare trust’ arrangement (with the beneficiary members being absolutely entitled to the relevant pensions assets), it may be able to ‘look through’ the pension wrapper to the underlying fund and provide compensation.
I should stress that in all these cases we are talking about situations where a provider (such as an insurance company or Sipp provider) goes bust or is unable to meet its obligations.
This is quite different from a situation where your pension simply falls in value because of poor investment performance, which is not generally covered by compensation arrangements.
However, if you felt that you had lost out because your money was being poorly invested on your behalf, for example by a financial adviser, you might be able to seek redress via a complaint to the Financial Ombudsman Service.
If you remain unclear about whether, and to what extent, your different pensions would be protected, FSCS encourages customers to contact their individual regulated firm or pension scheme to establish what compensation would be available.
The firm or scheme will know exactly how the pension has been set up and which type and level of compensation might be available if the worst should happen.
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