Can Pension Schemes Run Out Of Money?

Yes - although this is much less likely for occupational pensions that are based on money purchase schemes than those that use the final salary model.

Money purchase pension schemes invest the contributions made by you and your employer, providing you with a personal pension pot that will supply your benefits. These schemes can only have a shortfall where there has been theft or fraud, and in these cases, some of the money may possibly be recovered through the Pension Protection Fund.

However, final salary schemes take the money contributed by you and your employer and place it in one pension pot that provides benefits for all its retired members. If the amount that the pension pot has to pay out now (or in the future) is more than the total value of its investments, then the scheme will run out of money. In most cases, there is support available to compensate members if this happens.

Prevention Options

The trustees of a final salary pension scheme are responsible for ensuring that it doesn't run out of money. To limit future costs, the employer or the trustees can either close the company pension scheme to new members, or freeze the scheme so that it is closed to all members. Alternatively, they may wind it up completely so that it is fully closed down.

Closed Occupational Pension Schemes

In this type of pension scheme, new members may not join, although existing members can continue to contribute and receive a pension on retirement. The scheme will continue to run normally.

New employees will need to join alternative pension schemes; for example, the employer may offer access to a stakeholder pension, group personal pension plan (GPPP), or a new company pension scheme.

Frozen Occupational Pension Schemes

If a final salary scheme is frozen, then it is closed to everyone. No new members may join, and existing members cannot continue to make contributions. Existing benefits will stop building. In this case, the pension scheme administrator must inform existing members of the benefits they have earned. The employer must also provide access to a new company pension scheme.

Winding Up a Pension Scheme

If a pension scheme is wound up, it is closed down completely, and the assets are used to provide its members with benefits. Read on for more information on winding up a pension scheme.