How safe are my pensions? I was worried that the rules might seem confusing? STEVE WEBB replies

I have two defined benefit pensions from previous employment and also pension savings with three defined contribution schemes set up by previous employers, although I still contribute to one of them.

The DB schemes seem fine as the Pension Protection Fund seems to cover them. However, the same cannot be said of DC schemes.

The FSCS has a ‘pension protection checker’, When I tell them that I have money in a scheme, that it is a DC scheme and that I have not used an independent financial advisor, I am told the following: ‘Your defined contribution for a workplace pension could be set up like this that it is based on trust, on a contract basis or on a group basis.

‘FSCS protection depends on how your specific scheme is set up. It is up to you to find out what protection your pension offers.’

Even when I find out whether my pension is ‘trust, contract or group’, the website is silent on what the consequences of this might be. In short: this is useless.

Elsewhere on the FSCS site, it says: ‘If your pension provider or financial advisor goes bankrupt, we may be able to intervene and pay compensation.

‘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.ukwhich states: ‘If something happens to an investment provider, you can normally claim compensation from the Financial Services Compensation Scheme (FSCS).

‘Generally speaking, this means you are protected up to £85,000 for each institution your money is invested in. This includes money that you have invested in your pension, but also any other savings accounts. This also includes money that you have in cash at 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 could also be of particular importance given the advice often given to consolidate workplace pensions into one scheme.

If there is a limit of £85,000 on compensation per provider, this seems very silly. Is there any way you can provide some clarity?

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Steve Webb replies: It is important that people understand how safe their money is, whether it is invested in a pension or another financial product.

As you say, this could become especially important if more and more people decide to consolidate all their retirement savings in one place in the future.

However, as you have discovered, the rules surrounding pensions are far from simple.

In this column I will do my best to explain what protections are available, but (spoiler alert) the answer in some cases may still be: ‘it depends’ on the specific situation.

As you know, things are relatively clear in the case of a traditional DB pension.

When a private sector employer backs a DB pension, they are required to pay a levy to the Pension Protection Fund.

In the event that the company goes bankrupt and there is not enough money in the pension fund, the PPF will step in and cover a significant portion of the debt.

You can read more about the scope of Pension protection fund protection here.

In the case of more modern ‘pot of money’ pensions or defined contribution pensions (DC pensions), the situation is more complex.

This is mainly because DC pensions can be set up in different ways and the way compensation is structured depends on exactly how the pension was created and how the failure occurred.

To get more clarity, I contacted the Compensation scheme for financial services, This is probably the most important organization involved in providing compensation in the case of DC pensions, and has further expanded the information on its website.

Before I go any further, I should say that FSCS has been at pains to emphasize that the precise answer will always depend on the exact details of the exact pension scheme, and so what follows is intended only as a rough guide and not as a definitive statement of the law. .

One group of DC pensions are those from insurance companies, many of which are household names.

If your pension is a ‘long-term insurance contract’ with a regulated UK insurer and the insurer fails, FSCS may be able to protect it 100 percent under something called their ‘insurance sub-scheme’.

FSCS also has an ‘investment sub-scheme’ which could cover a situation where a self-invested personal pension (Sipps) provider fails.

In this case, cover of up to £85,000 may be available for disruptions since 1 April 2019.

The requirement in this case is that the Sipp company should owe the customer a legal liability – something for which the customer could have sued the company, such as failing to carry out proper due diligence on investments.

A slightly different cause of the ‘inability’ to pay out your full DC pension could occur if an underlying investment provider of assets held in a pension asset were to go bankrupt.

As you will appreciate, the money in a pension is likely to be invested in a range of assets and a range of providers.

FSCS says that in cases where the pension is referred to as a ‘bare trust’ arrangement (where beneficiary members have an absolute right to the relevant pension assets), it may be able to look through the pension packaging to the underlying fund and provide compensation.

I would like to emphasize that all of these cases involve situations in which a provider (such as an insurance company or Sipp provider) goes bankrupt or is unable to meet its obligations.

This is very different from the situation where your pension simply declines in value due to poor investment performance, which is usually not covered by compensation schemes.

However, if you feel that you have suffered damage because your money was invested poorly for you, for example by a financial advisor, you may be able to seek redress through a complaint to the Financial Ombudsman Service.

If you remain unclear whether, and to what extent, your various pensions would be protected, FSCS encourages customers to contact their individual regulated company or pension scheme to determine what compensation would be available.

The company or scheme will know exactly how the pension is set up and what type and level of compensation may be available if the worst happens.