Salting away a proportion of your pay is a tried-and trusted way of ensuring you have funds to rely on in your declining years, even if it means cuts to your income in during working life.
But what if the pension pot turns out to be empty at the end of the day? Will someone come to the rescue?
How pensions work
Basically, pensions are created by taking a percentage of workers’ wages and investing it to provide a proportional return, which can finance the years when they are no longer active in the work place.
Aside from the state pension – provided by the government when a certain age is reached – pensions come in two types.
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These are workplace pensions – often called ‘defined contribution pension schemes’ run by employers, and private pensions – usually run by investment experts such as banks and other fund managers.
Who protects workplace pensions?
The money in a defined contribution scheme is protected in several ways. If an employer goes bust, someone who pays in will not lose their money as they are usually run by pension providers, not employers.
If the pension provider goes bust, and was authorised by the Financial Conduct Authority, you can get compensation from the Financial Services Compensation Scheme (FSCS).
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Employers cannot touch the money in a pension if they’re in financial trouble – and funds are usually protected by the Government’s Pension Protection Fund if an employer goes bust and cannot pay out pensions.
This is funded by levies on pension providers and its own investments, not the taxpayer.
What if the pension fund has been 'raided'?
In the case of fraud or dishonesty – where an employer has raided a pension fund - people can apply to the fraud compensation fund.
However, this scheme only covers occupational pension scheme, and only pays out if the employer has become insolvent or is unlikely to continue as a going concern, and the pension scheme can’t be rescued.
The amount paid is determined by the difference between the value of the scheme’s net assets before the loss, and the value of the net assets before the application date.
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