What Happens When Your Pension Scheme Goes Bust?

The expressions “financial institution” and “pension fund” used to conjure up images of staid, respectable prudence. No one likes to think of their lifetime’s pension contributions being gambled recklessly. After all, that’s what you are relying on to fund a comfortable retirement. However, the fate of a pension scheme, like any part of the economy, is tied to the fate of the financial organization it is allied to. Professional pension funds and employers’ schemes alike are vulnerable to insolvency, and can go bust.

Let’s look at two famous examples of pension schemes that have failed, and see what lessons, if any the Government has learnt from them.

Equitable Life

The Equitable Life scandal is the proof that well-informed, well-educated professionals can be victims of financial disasters. Among those who lost out from Equitable Life’s collapse were lawyers, accountants and doctors.

The organization was established in 1762 and was one of the biggest mutually owned insurance associations in the world, at one point having 1.5 million policyholders. Its reputation as a financial giant was self-perpetuating - if over a million people trusted them with their savings, then surely their investment policies must be sound…

On certain policies, Equitable Life offered a Guaranteed Annuity Rate (GAR), which was a predefined level of income to be paid to members of pension schemes on their retirement. It became apparent however, that this was never going to materialise, and worse still that Equitable Life had at best been hopelessly optimistic about the prospect of ever achieving the GAR in the first place. The scandal was smashed open when a black hole of £1.5 billion was revealed in the difference between what Equitable Life had invested, and what was due to policyholders under the GAR scheme. The company was closed to new business in 2000, although the organization continues to operate on a pared down basis as The Equitable, with several hundreds of thousand policy holders.

Lord Penrose was commissioned to report on the Equitable Life scandal in 2004, and his findings were approved and endorsed in 2008 by a report by the Pensions Ombudsman, Ann Abraham. They both found that Equitable Life had exaggerated claims of its worth and employed “dubious” actuarial techniques to view the balance sheet of its various funds through rose tinted glasses. But Ann Abraham held that the blame should not just be shouldered by Equitable Life’s management. She concluded that the Government was also complicit, having failed to regulate the sector with adequate vigour.

Allied Steel & Wire

When Allied Steel & Wire went into receivership in 2002, it left 1,300 people without jobs and little or no pensions benefits. In fact, some people lost as much as 80% of their entitlement. It’s a growing pattern that cash-strapped employers are tempted to use whatever spare money they have to prop up their businesses rather than squirrel it away in a pension scheme. When the company collapsed, so did the pension scheme. But rather than blame the management, Pensions Ombudsman Ann Abrahams once again blamed the Government regulators for failing to keep a close enough eye on those who run such schemes.

After bringing a case against the Government for alleged failure to implement a European Union Directive requiring governments to protect pensions, the ex-employees of Allied Steel & Wire, like others who suffered a similar fate between 1997 and 2005, are entitled to make a claim from the Financial Assistance Scheme.

Pension Protection Fund

The Pension Protection Fund (PPF) was introduced in April 2005, and is funded mostly by raising a risk-based levy on existing pension schemes. The riskier the scheme, the higher the levy. This was introduced to counter the widespread criticism that the Government had not ensured that pension schemes had not set aside enough for a rainy day. Whilst this is a positive step forward, it should be noted that this fund only covers those with defined benefit (final salary) schemes, and not defined contribution schemes. So with defined contribution schemes, as ever, the risk of losing one’s pension remains with the employee.

What to do if the worst should happen

If the worst should happen and you wake in the morning to hear the news of your final salary pension scheme going up in smoke, here are the most practical steps to take.

• Dust off your pensions paperwork. Have all the details to hand.
• Keep an eye on the DWP website to check for any announcements.
• Contact the Citizen’s Advice Bureau for specific advice.