What happens to your pension if your employer goes bust?

Last year it became pretty clear to all who hadn't noticed already that high-street stalwart British Home Stores (BHS) was in trouble, when retail tycoon Sir Philip Green washed his hands of the chain for just £1. Now it has filed for a company voluntary agreement (CVA) a type of insolvency proceeding in an effort to drive down its rent costs. As a result, nearly 13,000 current and former BHS staff who are under retirement age will see their pension trimmed by 10%. Fortunately, most of those who are already drawing from their pension some 6,700 people can breathe a sigh of relief. They will not see any change to their payments. And full payments will also be made to those who have retired due to illness, or are receiving the pension of a deceased relative.

So what exactly is going on at BHS? And, perhaps more pertinently for readers, what happens to your pension if your employer goes bust? Let's start with BHS. The firm's woes stem from the huge deficit at the heart of its defined-benefit pension scheme (a defined-benefit scheme, unusual in the private sector these days, guarantees to pay retirees a set amount based on their earnings during their working lives). At its last valuation, the scheme had only £480m of assets to cover £710m of anticipated liabilities. "That is the sort of level that ought to ring alarm bells, especially with a firm such as BHS, where there were reasons to question the strength of the covenant," says Jonathan Ford in the FT.

The company's pension scheme deficit has soared since Green's private company, Arcadia, sold the chain. Now Tte Pensions Regulator (TPR) is reportedly considering ordering Green to pay £280m (about 12.5% of his estimated net worth) of the £300m it would cost the government-backed "lifeboat" Pension Protection Fund (PPF) to fill the gap if it has to take the scheme on. Green has reportedly so far offered to pay £80m towards the gap and Arcadia has said it will contribute a further £15m over three years. However, TPR has the power to order Green to pay more if it decides he should take a greater share of the blame for the hole in the scheme. Meanwhile, by filing for a CVA, BHS has triggered a mechanism that prevents trustees from paying pensioners more than they would receive if they had to be rescued by the government-backed PPF. This restriction will remain in place while an assessment is carried out to determine whether the scheme enters the PPF. If it does, then the cuts to pension payments will become permanent.

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If your company suffers a similar fate, here's what you'd need to know. Firstly, if you have a "money-purchase" or "defined-contribution" pension scheme, your pension pot isn't affected by this. But if you're in a defined-benefit scheme and the pension fund can't meet its liabilities, that's where the PPF steps in. Think of it as an insurance scheme. It was established ten years ago and covers almost 6,000 British direct-benefit schemes with total liabilities of around £1.6trn. For a small fee, these schemes are insured against the failure of their sponsoring company. If necessary, the PPF can tap other solvent schemes to ensure that pensioners of the insolvent company are not left out of pocket.

The PPF usually pays out 100% of your expected pension if you've already reached the scheme's pension age. But if you retired early, or have yet to retire, you will receive 90% of your expected pension payout. For those who retire at 65, the maximum payout will be £32,671.07 a year. For those who retire earlier, it will be lower. At current annuity rates, that still equates to a pretty generous pension for most normal earners but clearly that's not much consolation to those at BHS waiting for a resolution of the whole process.

Is this the end for the pension as we know it?

In an effort to get more people saving for retirement, George Osborne this week unveiled what looks like the government's halfway house to the "pension Isa" idea that floated around prior to the Budget the Lifetime Isa. This new Isa, which launches in April 2017, is designed to encourage people to save towards their golden years, or to purchase a first property. But older savers may be disappointed only those aged between 18 and 40 in April next year can benefit; and to encourage long-termism, there are punitive charges for those seeking to withdraw money early.

Savers will be able to contribute up to £4,000 a year, and for every £4 contributed, they will receive a £1 government bonus so up to £1,000 a year. There are no minimum monthly contributions. The Isa becomes freely accessible from the age of 60. Before then, the holder can also access the Isa to buy a first home worth up to £450,000. Otherwise, early access means the Isa holder loses the bonus, plus any interest earned on it, and is charged a 5% fee. Richard Parkin, head of pensions at Fidelity Worldwide Investment, played down talk of the Lifetime Isa signalling the end of the pension as we know it. "The younger age group [face] real struggles between saving for a pension and saving to get on the property ladder," he said. "The Lifetime Isa straddles that idea well." But it's hard to avoid the feeling that this is just a step towards Osborne's apparent ultimate goal of replacing the existing pensions system altogether.

Your pot at a glance

One problem with pensions (as opposed to Isas) is that many people struggle to have a clear idea of what they actually have. Consumer body Which? recently found that almost half of the over-50s don't know the value of their pension. The group has campaigned for a digital "pensions dashboard", which would let users see all their pots in one place. George Osborne following recommendations in the Financial Advice Market Review has asked the pensions industry to design, fund and launch such a dashboard by 2019. Whether or not this can be met is another matter many argue that the market is currently too fragmented to allow the information to be compiled in a standardised format.