With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
Cash is draining fast and employees worry their pension savings will disappear with the business. At the same time, directors worry that one wrong decision could create personal risk later. Pension savings are normally held separately from the employer, yet insolvency still triggers strict notification duties, contribution claims and regulatory oversight.
This guide explains what actually happens to workplace pensions when a company enters liquidation, where the real risks sit, and what steps directors should take first.
Are employee pension pots lost when a company folds?
No. Money already held inside a pension scheme does not belong to the company and is not available to creditors if the employer becomes insolvent.
Occupational pension schemes are typically run under trust arrangements, meaning scheme assets are held separately from the employer for members’ benefit. GOV.UK confirms that an employer cannot access pension money simply because the business is in financial difficulty.
At a glance:
Defined Benefit (DB) schemes promise a level of retirement income. If the employer becomes insolvent and the scheme cannot secure benefits in full, the Pension Protection Fund (PPF) may step in and pay statutory compensation.
Defined Contribution (DC) schemes hold individual member pots. Existing savings remain invested, although future employer contributions stop.
Because assets are legally separate, the immediate issue is usually not loss of existing savings but disruption. Insolvency may stop contributions, create arrears and require formal notifications between trustees, the insolvency practitioner and the PPF where a DB scheme exists.
The key point is simple: employee pension savings remain theirs, but the employer and insolvency practitioner must still deal correctly with records, deductions and outstanding contributions.
Why liquidation still matters to workplace pensions
Liquidation removes the employer as the funding source for the pension arrangement. From that moment, responsibility shifts largely to trustees and, where relevant, the PPF assessment process.
When a qualifying insolvency event occurs in relation to a defined benefit scheme, the insolvency practitioner must submit a section 120 notice to the Pension Protection Fund. This notice informs the PPF that an insolvency event has occurred and allows the assessment process to begin. The notice must normally be submitted within 14 days of the insolvency practitioner’s appointment or becoming aware that a relevant pension scheme exists.
For DB schemes, this starts the PPF assessment period, during which:
trustees continue running the scheme,
pensions in payment normally continue to be paid,
and the PPF assesses whether the scheme can secure benefits above PPF compensation levels.
Defined contribution arrangements do not enter the PPF, as benefits depend on the value of individual investment pots rather than employer guarantees.
Director red flags: unpaid contributions, Section 75 debt and regulatory risk
Most pension-related risk in insolvency arises from unpaid contributions rather than from the pension scheme itself.
Unpaid employee deductions
Amounts deducted from employees’ wages for pension contributions but not yet paid into the scheme may rank as preferential debts in insolvency under Schedule 6 of the Insolvency Act 1986, which refers to certain pension contributions defined in pension legislation.
These sums must be identified accurately during liquidation so they are treated with the correct priority.
Section 75 employer debt
Where a defined benefit scheme is in deficit, insolvency can trigger a Section 75 employer debt under the Pensions Act 1995. This represents the cost of securing members’ benefits with an insurer and usually ranks as an unsecured claim against the company.
The Pensions Regulator has anti-avoidance powers and may issue Contribution Notices or Financial Support Directions in certain circumstances, particularly where actions have materially weakened the scheme’s position. Directors are not automatically personally liable, but conduct before insolvency may be reviewed.
Contribution handling risks
If contributions have been deducted from wages, they should normally be paid across in accordance with scheme rules. Failure to deal properly with deductions can lead to regulatory investigation, so early communication with trustees and the insolvency practitioner is important.
Identify your pension scheme and likely outcome
The outcome of insolvency depends largely on the type of pension arrangement in place.
Scheme type
PPF cover?
Who runs it after insolvency
Member risk level*
Immediate employer duties
Defined Benefit (DB)
Yes, if scheme cannot secure benefits above PPF level
Trustees during assessment; then PPF or insurer
Medium – benefits may reduce to compensation level
Cooperate with trustees and IP; provide scheme data
Defined Contribution (DC) trust
No
Trustees continue running scheme
Low – pot remains invested
Identify unpaid contributions and provide records
Hybrid
DB element only
Trustees
Varies
As above plus deficit information
Group Personal Pension (GPP)
No
Insurance provider holds policies
Very low
Stop future deductions and confirm arrears
Stakeholder pension
No
External provider
Very low
Provide payroll and contribution data
Auto-enrolment master trust
No
Master trust trustees
Very low
Notify provider and reconcile contributions
*Risk reflects likelihood of members receiving less than originally expected.
Defined Benefit schemes in liquidation and the PPF route
A qualifying insolvency event involving a DB scheme normally leads to entry into the PPF assessment process.
How the route unfolds
Insolvency event: administration, liquidation or another qualifying event occurs.
Section 120 notice: insolvency practitioner submits notice to the PPF.
Assessment period begins: the PPF assesses whether the scheme can secure benefits without PPF support.
Trustee role: trustees continue administering the scheme, subject to PPF rules.
Outcome: the scheme either transfers to the PPF or secures benefits outside it.
The PPF states that assessment periods typically take around two years on average, although this varies depending on scheme complexity.
If the scheme transfers, members receive statutory PPF compensation, which broadly replaces scheme benefits subject to PPF rules on indexation and compensation levels.
The Section 75 deficit remains a claim against the employer in the insolvency.
Defined Contribution, master trust and personal-style schemes
In defined contribution arrangements, each member’s pot is already separated from the employer. Company insolvency does not affect ownership of those funds.
What changes is funding:
future employer contributions stop,
running costs may be met from scheme assets rather than employer payments in trust-based schemes,
members may continue contributing through a new employer or individually.
Because DC arrangements are money purchase schemes, they do not enter the PPF.
Director checkpoints:
ensure payroll records accurately show deductions made,
identify any unpaid contributions,
provide scheme documentation to the insolvency practitioner and trustees or provider.
Your first 14-day duty checklist
The early period following insolvency is mainly about information and cooperation rather than complex decision-making.
Identify all pension arrangements used by the company.
Compile schedules of employee and employer contributions, including any unpaid amounts.
Provide scheme documentation and payroll records to the insolvency practitioner.
Ensure the insolvency practitioner is aware of any DB scheme requiring a section 120 notification to the PPF.
Inform trustees or providers of the insolvency event so administration can continue smoothly.
Communicate clearly with employees about where pension queries should be directed.
Settling unpaid contributions and deficit claims
Where contributions remain unpaid at insolvency:
pension scheme administrators or trustees submit claims using forms such as RP15 and RP15A, with insolvency practitioner input,
additional forms may apply for DB or hybrid schemes.
Payments made through the Redundancy Payments Service are then recovered from the insolvent estate according to insolvency priorities.
Preferential status increases the likelihood of recovery compared with ordinary unsecured claims, although full repayment is not guaranteed.
Who does what: trustees, insolvency practitioner and directors
Clear roles reduce the risk of missed steps.
Key task
Lead party
Timing
Continue scheme administration
Trustees
Ongoing
Section 120 notice submission
Insolvency practitioner
Within statutory timeframe
Provide payroll and scheme records
Directors
Early stage
Assess PPF eligibility
PPF and trustees
During assessment
Submit contribution claims
Trustees / scheme administrators
After insolvency confirmed
Employee communications
Directors initially, then trustees
Early stage
Common pitfalls and how to avoid them
Assuming pension pots form part of company assets.
Failing to identify unpaid employee deductions early.
Treating pension arrears like ordinary trade debts.
Overlooking older DB or hybrid benefits.
Delayed communication with trustees or providers.
Assuming PPF entry removes all pension-related liabilities.
Alternatives to liquidation when pensions dominate liabilities
Where pension liabilities are significant, formal restructuring options may be explored before liquidation, including company voluntary arrangements or restructuring plans under Part 26A of the Companies Act 2006. These processes may allow continued trading while negotiating with creditors, including pension trustees, although outcomes depend heavily on funding and regulatory approval.
Early professional advice is essential where pension deficits form a major part of company liabilities.
FAQs
1) What happens if the section 120 notice is late?
The insolvency practitioner should submit the notice as soon as possible. The PPF assessment process cannot proceed properly until it is received, and delays may require explanation to the PPF and regulators.
2) Can directors be personally liable for Section 75 debt?
No, not automatically. The debt belongs to the company. Personal exposure may arise only in specific circumstances, for example where regulatory action is taken under The Pensions Regulator’s anti-avoidance powers.
3) Does the PPF cover pensioners already receiving benefits?
Yes. During the assessment period pensions normally continue to be paid by trustees, and if the scheme transfers to the PPF, payments continue as statutory compensation under PPF rules.
4) What happens to salary sacrifice arrangements?
Salary sacrifice is a payroll arrangement. Once employment ends or payroll stops, new contributions cease. Contributions already paid into the scheme remain protected.
5) Can contributions simply be stopped when insolvency becomes likely?
Employers should take advice before changing payroll arrangements. Contributions already deducted from wages should be dealt with properly and recorded accurately.
6) How are AVCs treated?
Additional Voluntary Contributions are held for members within the scheme and remain separate from company assets.
7) Does administration instead of liquidation change pension outcomes?
Administration is also a qualifying insolvency event for DB schemes, so the PPF assessment process may still begin. DC arrangements are generally unaffected in either process.
8) Are stakeholder pensions affected?
No. These are individual contracts between the employee and provider. Only future employer contributions stop.
9) Do unpaid pension contributions rank ahead of HMRC?
Certain employee-related pension contributions rank as preferential debts under insolvency legislation, alongside other employee preferential claims.
10) How long before PPF compensation starts?
Assessment periods vary, but the PPF indicates they typically take around two years on average. Pension payments usually continue during this time.
Director action checklist and next step
Prompt organisation reduces risk and helps protect employees’ savings.
Locate scheme documents and contribution schedules.
Identify unpaid employee and employer contributions.
Confirm scheme type and whether a DB scheme exists.
Provide full payroll and scheme data to the insolvency practitioner.
Ensure trustees or providers have up-to-date contact details.
Keep clear records of decisions and communications.
If pension obligations form a significant part of the company’s position, speak to a licensed insolvency practitioner early to ensure statutory notifications and contribution issues are handled correctly.
