How safe are my pensions? Am I worried that the rules seem confusing? STEVE WEBB responds

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 am still contributing to one of them.

The DB schemes seem to be doing well as the Pension Protection Fund appears to cover them. However, the same cannot be said for CD schemes.

He FSCS has a ‘pension protection checker’, and when I tell him that I have money in a plan, that it’s a DC plan and that I didn’t use an independent financial advisor, he tells me that: ‘Your workplace defined contribution pension could be set up to be based on a trust , by contract or by group.

‘FSCS protection would depend on how your particular scheme has been set up. It’s up to you to find out what protection your pension has.’

Even if I find out whether my pension is “trust-based, contract-based or group-based”, the website says nothing about what the consequences of this might be. In short, this is useless.

Elsewhere on the FSCS site, says: ‘If your pension provider or financial adviser closes, we may be able to step in and pay compensation.

“But FSCS protection varies depending on the type of pension product, and there are limits to the amount we can offset.”

However, this is directly contradicted by moneyhelper.org.ukwhich says that: ‘If something were to happen to an investment provider, they would normally be able to apply for compensation from the Financial Services Compensation Scheme (FSCS).

‘In general, this means you are protected up to £85,000 for each institution you invest your money in. This includes money you have invested in your pension, as well as any other savings accounts. It also includes money you have in cash in 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 often-considered advice to consolidate workplace pensions into a single scheme.

If there is a limit of £85,000 on compensation per supplier, this would seem foolish. Is there any way you can provide some clarity?

SCROLL DOWN TO FIND OUT HOW TO ASK STEVE HIS PENSION QUESTION

Steve Webb responds: It is important for people to understand how safe their money is, whether they invest it in a pension or some other financial product.

As you say, this may become particularly important if more and more people decide in the future to consolidate all their pension savings in one place.

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

In this column I will do my best to lay out what protections are in place, but (spoiler alert) the answer in some cases may be “it depends” on the specific situation.

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

When a private sector employer supports a DB pension, it must pay a tax 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 proportion of what is owed.

You can read more about the scope of Protection of the Pension Protection Fund here.

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

This is mainly because DC pensions can be established in a variety of ways and how compensation is structured depends on exactly how the pension was established and how the bankruptcy arose.

To try to get more clarity, I have been in contact with the Financial Services Compensation Plan, which will likely be the main organization involved in providing compensation in the DC pension case, and has expanded the information a bit more on its website.

Before I continue, I must say that the FSCS is at pains to emphasize that the precise answer will always depend on the exact details of the exact pension arrangement, so what follows is only intended to be a rough guide and not a definitive statement of the law. .

One group of DC pensions are those provided by 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, the FSCS can protect it 100 per cent under something called its “insurance subscheme”.

The FSCS also has an ‘investment subsystem’ which could cover a situation where a self-invested personal pension provider (Sipps) goes bankrupt.

In this case, for breakdowns from 1 April 2019, cover may be available up to £85,000.

The requirement in this case is that the Sipp company would have to owe the client a civil liability, something for which the client could have sued the company, such as failing to carry out investment due diligence.

A slightly different cause of ‘default’ in paying your full DC pension could arise if an underlying investment provider of an asset held within a pension were to fail.

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

FSCS says that in cases where the pension is something called a ‘basic trust’ arrangement (where beneficiary members have absolute rights to the relevant pension assets), you may be able to ‘see through’ the wrapping of the pension to the underlying fund and provide compensation.

I must stress that in all of these cases we are talking about situations where a provider (such as an insurance company or Sipp provider) goes bankrupt or is unable to meet its obligations.

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

However, if you believe that you have lost out because your money has been misinvested on your behalf, for example by a financial advisor, you may be able to seek redress by making a complaint to the Financial Ombudsman Service.

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

The company or scheme will know exactly how the pension has been set up and what type and level of compensation might be available if the worst were to happen.