Directors often find that dealing with pensions is one of the more complex aspects of company liquidation. Specific processes, deadlines, and protections must be understood for a smooth winding-up.
The guide outlines what Directors need to know about pensions during insolvency and liquidation. You’ll learn the main rules, the different pension arrangements, and the key actions needed to ensure everything is handled properly.
Pensions and liquidation: the basics for Directors
When a company cannot pay its debts and needs to close, Directors may decide to enter a Creditors’ Voluntary Liquidation (CVL). This formal insolvency procedure is designed to wind up the company’s affairs in an orderly and fair way, aiming to balance the interests of creditors, employees, and Directors.
Clarke Bell works with Directors throughout this process, including matters involving pensions and employee entitlements, ensuring everything is compliant and correctly documented.
What happens to pensions during liquidation in the UK?
Pension pots are usually kept separate from company assets and remain protected. This means they are protected from company creditors and are not used to pay company debts during the liquidation process.
However, the structure of your company’s pension schemes can influence what happens to employee and Director pensions during the liquidation process.
Types of company pensions
Most UK workplace pensions fall into one of two categories:
Defined contribution pensions
Defined contribution schemes are based on regular contributions from employees and employers. These contributions are invested in a pension pot, with the value at retirement depending on how much was paid in and how well the investments performed.
Defined benefit pensions
Defined benefit schemes promise a set income in retirement, usually based on salary and years of service. The employer is responsible for ensuring enough money is in the scheme to pay the promised benefits.
Defined contribution pensions in a liquidation
Defined contribution pensions are the most common type of workplace scheme in the UK. They are usually managed by an independent pension provider.
In the event of a CVL, the funds within these pension schemes remain protected for employees and Directors, as they are held in trust. The pension pots of members are safe even if the company becomes insolvent, except for any outstanding employer contributions.
If the company has not made all employer pension contributions in the 12 months before liquidation, there is a process for recovering those amounts. These unpaid contributions can often be claimed from the National Insurance Fund. Clarke Bell’s insolvency practitioners help identify these unpaid amounts and support the claims process alongside the scheme administrator.
What if the company uses a Nest pension scheme?
Nest is a UK government-backed workplace pension scheme operated by the National Employment Savings Trust. It is widely used by employers to meet their automatic enrolment duties.
Importantly, all Nest pension savings are kept in a separate trust, independent from the company’s finances. This means that if a company using Nest goes into liquidation, employees’ pension savings remain safe and cannot be used to pay company debts.
Once the business enters liquidation, it will stop making contributions to the Nest scheme. However, employees can choose to leave their savings in the scheme or transfer them to another pension provider, depending on their preference.
Directors should ensure that all employer contributions due to Nest are paid before the liquidation process begins. Failure to do so may result in enforcement action from The Pensions Regulator. Clarke Bell can help review your contribution records and make sure any outstanding payments are addressed properly before liquidation.
Defined benefit pensions in a liquidation
Defined benefit pension schemes promise members a specific income in retirement, usually based on salary and years of service. These schemes are generally more complex and place a funding obligation on the employer.
When a company with a defined benefit scheme enters a CVL, the scheme’s trustees take on a critical role. They must assess the financial position of the pension scheme and communicate with Directors about the next steps.
If the pension scheme is underfunded at the point of liquidation, the trustees will notify the Pension Protection Fund (PPF). The PPF will begin an assessment period, during which it will determine whether the scheme can continue paying benefits or whether it will take over responsibility for members’ pensions.
Members who have already retired typically receive their full pension as promised by the scheme. Members who have not yet reached retirement age usually receive 90% of their promised pension. The PPF’s involvement can last up to two years while it carries out its assessment and, if necessary, takes over the scheme.
During this time, Clarke Bell liaises with scheme trustees and Directors, ensuring proper communication and coordination as the PPF evaluation proceeds.
Unpaid employer pension contributions during liquidation
Unpaid pension contributions are a common concern when a company enters liquidation. If employer contributions were not paid in the 12 months before the liquidation, they can usually be claimed from the National Insurance Fund.
The insolvency practitioner and pension scheme administrator will identify any unpaid amounts and handle the claims process. Directors should make sure payroll and contribution records are complete and up to date so that all eligible claims can be made. Clarke Bell ensures these records are reviewed early and helps directors meet all requirements to recover funds from the National Insurance Fund.
Are employee and Director pensions protected if a company goes into liquidation?
Employee and Director pensions are generally protected if a company goes into liquidation. There are legal safeguards in place for both employee and Director pensions.
Protections for defined contribution schemes
Defined contribution pensions are kept separate from company assets and are protected from creditors. This means that, except for any outstanding employer contributions, employee and Director pension pots remain secure.
Protections for defined benefit schemes
The Pension Protection Fund steps in for defined benefit schemes if the scheme cannot pay all promised benefits due to employer insolvency. The PPF ensures that most members receive at least 90 to 100% of their pension benefits, depending on their circumstances.
Additional pension insolvency safety nets
If there are unpaid employer pension contributions in the 12 months leading up to insolvency, Directors and the insolvency practitioner can arrange to claim these amounts from the National Insurance Fund. This fund exists to protect employee and Director pension rights in situations where employer contributions have not been made.
Further protections exist for exceptional circumstances, such as fraud or provider failure. The Fraud Compensation Fund provides a safety net for schemes affected by dishonesty, while the FSCS protects members if a pension provider becomes insolvent.
Related: What Happens to Your Employees During Insolvency?
What is the Pension Protection Fund?
The Pension Protection Fund is a statutory body established to protect members of eligible defined benefit pension schemes if their employer goes insolvent and the scheme cannot pay all promised benefits.
If a defined benefit scheme is underfunded at the time of liquidation, the PPF will begin an assessment period to determine if the scheme qualifies for its protection. During the assessment period, members who have already retired receive 100% of their pension benefits. Those below retirement age usually receive 90%.
Compensation payments from the PPF are subject to annual increases, but only the part of the pension earned after April 1997 increases each year (capped at 2.5%). Since 2021, there has been no overall cap on compensation. The assessment process can last up to two years, during which time members and Directors will receive regular updates from the scheme administrators.
What happens to Directors’ pensions in a liquidation?
Directors who are members of the company pension scheme have their pensions protected under the same rules as employees.
If you have special arrangements such as salary sacrifice, additional contributions, or a unique role in the scheme, it is important to clarify your status early. Keeping clear records, working with trustees, and seeking professional advice can help prevent misunderstandings during liquidation.
Related: Who Gets Paid First When a Company Goes Into Liquidation?
What practical steps should Directors take before and during a CVL?
Taking the proper steps early can help Directors avoid mistakes and protect their interests and those of their employees. By staying organised and proactive, Directors can ensure the liquidation process runs smoothly and remains fully compliant with regulations.
At Clarke Bell, we guide Directors through each of these steps, helping them fulfil their duties confidently and efficiently.
Communication is key
Start conversations with pension scheme trustees, scheme administrators, and staff as soon as possible. Open communication builds trust and makes it easier to address any issues that arise. Keep detailed and up-to-date records of all pension contributions, payments, and scheme documents, as these will be important for audits and future reference.
Stay compliant
Regularly review the status of all employer pension contributions to ensure they have been paid correctly and on time. If any contributions are outstanding, address them promptly.
Make sure all necessary notifications are submitted to the relevant bodies, including The Pensions Regulator, the Pension Protection Fund, and the pension scheme trustees or managers.
Clarke Bell manages these regulatory requirements on your behalf, ensuring full compliance throughout the CVL.
Advise employees
Take time to inform employees about what is happening with their pensions during the liquidation process. Clearly explain the protections in place and let employees know where to find further information. Encourage staff to check their own pension statements and contact the scheme provider if they have any questions or notice any discrepancies.
Key pension insolvency takeaways
- Defined contribution pension pots are normally safe and separate from company assets.
- The Pension Protection Fund protects most defined benefit pensions if a scheme is underfunded at liquidation.
- Unpaid employer contributions in the 12 months before liquidation can often be claimed from the National Insurance Fund.
- Directors should keep good records, communicate clearly, and support employees throughout the process.
- Specialist advice can help Directors fulfil their responsibilities and protect everyone’s interests.
Clarke Bell can help
If your company is struggling with debts it cannot pay, a Creditors’ Voluntary Liquidation is often the most responsible way to bring closure and protect all parties involved.
Clarke Bell has helped thousands of Directors through the CVL process, providing expert support and making each stage as clear and manageable as possible. We offer a free, no-obligation consultation and fixed-fee packages, giving you the information you need to make the right decision.
You do not have to face insolvency alone. Contact Clarke Bell today for trusted advice and help with every aspect of liquidation.
Frequently asked questions
Are employee pensions protected if a company goes into liquidation?
Yes. Defined contribution pensions are ring-fenced and safe from creditors. The Pension Protection Fund protects defined benefit pensions if the scheme cannot meet its promises due to insolvency.
Do Directors lose their pensions if the company goes bust?
Directors who are scheme members are protected in the same way as employees, as long as contributions and records are in order. Directors with special arrangements should seek early advice and ensure everything is properly documented.
What happens to unpaid employer pension contributions in liquidation?
Unpaid employer contributions from the 12 months before insolvency may be recovered from the National Insurance Fund. The insolvency practitioner and scheme administrator will usually handle this process.
How are defined benefit pensions affected by liquidation?
If the scheme is underfunded, the trustees will contact the Pension Protection Fund, which will assess and, if necessary, take over the scheme. Retired members typically receive full benefits, while those not yet retired usually receive 90%.
How should Directors communicate pension changes to employees in a liquidation?
Directors should be open and prompt when updating employees about their pensions. They should explain the protections in place, the steps being taken to recover any unpaid contributions, and advise employees to check their own pension statements and seek independent advice if needed.
Can pensions be transferred during liquidation?
Generally, pension transfers are not allowed after the scheme enters the PPF assessment or once liquidation has started. Professional advice is recommended before attempting any transfer.
