The Investment and Business News editor is on holiday this week. We are running one guest article a day in his absence.

Given the huge amount of attention that the media has paid to the protection of savings accounts and bank deposits, it is surprising that remarkably little has been written about what the protection of pensions, in the event of a pension provder going bust.

For those in final salary schemes, there is the government-sponsored, but industry-funded Pension Protection Fund which pays members’ pensions in the event of the sponsoring employer going bust. Providing the insolvent scheme meets certain conditions, the PPF will pay out around £28,000 pa per member, but with no inflation linking.

This may be adequate for low to medium income workers, but highly paid employees face a significant cut in pension compared to their expected benefits. Furthermore, there are concerns that the PPF  could be overwhlemed by claims if thousands of company pension schemes become insolvent during the recession and look to it for a bail-out.

On the personal pension front, things are slightly more complicated, but the first port of call for any insured personal pension scheme,  which are managed by an insurance company and invested in insurance company funds would be the Financial Services Compensation Scheme or FSCS.

If the pension provider is declared in default, the FSCS would regard stakeholder pensions and group personal pensions as insurance products and investors would be entitled to redress consisting of the first £2,000 of any claim, plus 90 per cent of the balance.

If the pension provider uses the insured funds of another pension provider (ie ‘external funds’), and the pension provider defaults, investors are still covered by the £2,000, plus 90 per cent formula for compensation.

However, if the external fund manager becomes insolvent, the pension provider, rather its customers are regarded as the investor because the pension provider will have established its own insured fund , which will be invested in an Oeic run by a third party fund manager. So the provider, as the owner of this investment, will be regarded as a large company and ineligible for compensation from the FSCS.

This might sound alarming, but an Oeic manager is required by law  to hold all its Oeic assets in the name of a separate depositary and the assets would normally only be at risk if the fund manager had acgted dishonestly or fraudulently. So investors would be compensated by the firm’s administrator via a direct payout from the assets in the Oeic funds.

As for Sipps, these may be invested within a trust structure or in insured funds. Depending on how the trust is structured, it may be possible for the pension provider to make an individual claim on behalf of each Sipp holder.

If the Sipp is invested in insured funds, the FSCS’s £2,000 + 90 per cent compensation rule would kick in.

But where a Sipp invests directly in mutual funds, rather than within an insured fund wrapper, the mutual fund is regarded as ‘investment business’ and protection is 100 per cent of the first £30,000 and 90 per cent on the next £20,000, or a total of £48,000, although the administrators should be able to meet claims without having to revert to the FSCS.

Sipp money invested in UK bank and building society accounts is protected up to £50,000, but deposits in overseas bank accounts are protected by the rules of the country in which the bank is domiciled, which may be less generous than those applying in the UK.

This has led to problems for Sipp holders with money deposits in IceSave accounts in the Isle of Man which at the time of the Iceland bank’s demise had no depositor protection scheme in place.

Read the Defaqto Sipp guide:
http://www.defaqto.com/consumer/pensions/compare-sipps/guide-to-sipps.aspx

Read the Defaqto stakeholder pension guide:
http://www.defaqto.com/consumer/pensions/stakeholder-pensions.aspx

Check out the top savings rates on Defaqto’s best buy tables:
Cash Isas
http://www.defaqto.com/consumer/savings-accounts/cash-isas.aspx
Regular savings
http://www.defaqto.com/consumer/savings-accounts/regular-savings-accounts.aspx
Instant access
http://www.defaqto.com/consumer/savings-accounts/instant-access-accounts.aspx
Term accounts
http://www.defaqto.com/consumer/savings-accounts/term-accounts.aspx
Notice savings accounts
http://www.defaqto.com/consumer/savings-accounts/notice-savings-accounts.aspx

Written by PAMELA ATHERTON