What Happens to Your Pension If Your Employer Goes Bust?

Most people with a defined benefit (DB) pension — a final salary or career average scheme that promises a set income in retirement — are aware that their income ultimately depends on the financial health of their employer. What many do not know is what happens if that employer goes insolvent and the pension scheme does not have enough assets to meet its obligations.

The answer, in most cases, involves the Pension Protection Fund. This guide explains how the PPF works, what it covers, what it does not, and what you should do if you believe your pension scheme is at risk.

What Is the Pension Protection Fund?

The Pension Protection Fund (PPF) is a statutory fund established by the Pensions Act 2004. It provides compensation to members of eligible defined benefit pension schemes when their employer becomes insolvent and the scheme does not have sufficient assets to cover full benefits.

The PPF is not a government guarantee — it is funded by levies paid by participating DB schemes (and historically by the assets taken on from failed schemes). However, in practice, the government has generally been seen as a backstop in extreme scenarios.

As of 2026, the PPF protects the pensions of several million members of eligible schemes and manages assets of over £30 billion. It is one of the largest institutional investors in the UK.

Which Schemes Are Eligible?

The PPF covers eligible defined benefit occupational pension schemes in the UK. Broadly, this includes:

• Most private sector final salary and career average revalued earnings (CARE) schemes
• Schemes registered in the UK and subject to HMRC registration requirements

The PPF does not cover:

• Defined contribution (DC) schemes, also called money purchase schemes (your pension pot is held in your name, invested in funds; the employer's insolvency does not directly affect your pot — though if the employer was also the trustee, there are separate protection mechanisms)
• The State Pension (this is a separate government obligation)
• Personal pensions and SIPPs
• Public sector DB schemes (NHS, teachers, civil service, police, armed forces) — these are unfunded, backed by the government directly, and do not need the PPF

How Does the PPF Calculate Compensation?

This is where many people are surprised. PPF compensation is not 100% of your accrued pension. The level of compensation depends on whether you had already reached the scheme's normal retirement age when the employer became insolvent.

If you were already receiving your pension (or were above the scheme's normal retirement age) when the employer failed: you receive 100% of your pension entitlement from the scheme.

If you had not yet reached normal retirement age when the employer failed: you receive 90% of your entitlement.

Important — the PPF compensation cap has been removed. A cap on PPF compensation previously applied, limiting the maximum amount payable. However, in July 2021 the Court of Appeal ruled in Hughes v Pension Protection Fund that the compensation cap was unlawful on grounds of age discrimination. As a result, the PPF removed the cap and it is no longer applied. Members who were previously affected have been, or are being, paid arrears. For current assessments, PPF compensation is 90% (or 100% for those above NRA) of the full accrued pension, with no upper limit.

This means the earlier concern that high earners with large DB pensions faced a significant cut at the cap no longer applies in the same way. The 90% / 100% rules still apply; it is the absolute ceiling that has been removed.

Indexation in the PPF

PPF compensation is linked to inflation, but not completely. Increases in PPF compensation are capped at 2.5% per year, regardless of actual CPI inflation. This is below the inflation protection many DB schemes provide (often RPI-linked with higher caps), meaning PPF members may see their real income erode more over time than if the scheme had continued in full.

Pre-1997 accruals may receive no indexation at all in the PPF, depending on the scheme rules and when the scheme entered the PPF.

What Triggers a PPF Assessment?

The process begins when an employer becomes insolvent. An insolvency practitioner (administrator, liquidator, or trustee in bankruptcy) takes over the employer's affairs. At this point, the pension scheme enters a PPF assessment period.

During the assessment period (which can last one to three years or longer), the scheme trustees work with the PPF and actuaries to determine whether the scheme has sufficient assets to pay full benefits. Existing pension payments are usually maintained during this period.

If the scheme is found to be insufficiently funded, it transfers to the PPF. Members become PPF members and receive PPF compensation.

If the scheme has sufficient assets to pay full benefits, it does not enter the PPF — instead, the assets are used to secure benefits with an insurance company (a process called "buyout"). This is a better outcome for members.

Checking Your Scheme's Funding Level

You do not have to wait for a crisis to understand your scheme's position. Defined benefit schemes are required to publish annual funding valuations. These show the funding ratio — the ratio of assets to liabilities — expressed as a percentage.

A scheme at 100% is fully funded. A scheme at 80% has 80p of assets for every £1 of liabilities. Underfunding does not automatically mean a scheme will fail — employers are required to agree recovery plans to fill deficits over time — but it does indicate risk if the employer's financial position deteriorates.

You can request your scheme's annual report and accounts from the trustees. The Pensions Regulator also publishes aggregate data on DB scheme funding in the UK. Scheme-specific funding updates are typically sent to members annually.

Red flags to watch for in your scheme:

• A funding ratio consistently below 90%
• A long recovery plan (10+ years to close the deficit)
• Employer covenant concerns — is the sponsoring employer financially strong? Look at its credit ratings, publicly available accounts, or industry news.
• A scheme that is "closed to accrual" — not accepting new contributions — may indicate the employer is looking to reduce pension obligations.

What to Do If You Are Concerned

If you believe your DB scheme is at risk, you have several options:

Understand your entitlement: request a statement of your accrued pension from the scheme trustees. Know what you are entitled to and what PPF compensation would look like.

Consider a transfer value: if you have not yet retired, you may be able to transfer your DB entitlement out of the scheme into a personal pension or SIPP, at the scheme's cash equivalent transfer value (CETV). This removes you from the failed-scheme risk but also gives up the guaranteed income. For most members, retaining the PPF-protected DB pension is likely to be in their best interest — and under FCA rules, those with CETVs above £30,000 must take regulated financial advice before transferring. Treat unsolicited offers to transfer your pension as a major red flag — pension scams frequently use this approach.

Diversify other retirement income: if you hold a significant DB pension in a potentially at-risk scheme, ensure that your other retirement assets (DC pensions, ISAs, property) are not concentrated in the same employer's shares or funds.

Monitor the Pension Protection Fund website: the PPF publishes details of schemes in assessment and compensation levels. Regular monitoring is straightforward.

The US Equivalent: The PBGC

For comparative purposes, the United States has a similar body — the Pension Benefit Guaranty Corporation (PBGC) — which insures private sector defined benefit pensions. As of 2025, the PBGC guarantees up to around $7,050 per month for a 65-year-old, with adjustments for age and plan type. The parallels with the PPF are close: a government-backed insurance mechanism, funded by employer premiums, that steps in when schemes fail.

Compliance Note

PPF compensation rules, indexation provisions, and eligibility criteria are subject to change. This article reflects the position as of June 2026, including the removal of the compensation cap following Hughes v PPF (Court of Appeal, 2021). It is intended for general information only. If you believe your pension scheme is at risk, you should seek advice from a regulated financial adviser and consult the Pensions Regulator and PPF directly. This is not financial advice.

How Global Investments Can Help

For clients with significant DB pension entitlements, understanding the employer covenant and scheme funding position is an important part of retirement planning. We can help you understand the options available — including transfer value analysis (where appropriate and with regulated advice) and broader retirement income diversification strategies. Contact our team to discuss your pension situation.