Going bust: House of Fraser was bought out of administration by Mike Ashley’s Sports Direct, but how will its pension scheme members be affected?
I am an ex-employee of House of Fraser and someone who took his final salary pension approximately 10 years ago.
It pays a modest monthly pension from the House of Fraser Pension Fund.
I am deeply troubled by the recent news concerning this once mighty department store group.
Can you advise me? What will happen to the pension fund? Will my pension be safe?
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Steve Webb replies: When the news is full of stories about your former employer going into administration it is entirely understandable that you would be worried about what this means for your pension.
The good news is that there is a comprehensive ‘lifeboat’ scheme called the Pension Protection Fund which means that you should see very little change to your pension, though younger scheme members (those under scheme pension age) may see a bigger impact.
When a company goes bust and the pension fund is well short of the money needed to pay out all of the pension promises, it is usually transferred into the Pension Protection Fund (PPF).
This is basically a mandatory insurance arrangement where firms running salary-related company pensions pay in a levy each year and in return their scheme members are covered if the sponsoring employer goes out of business.
The level of compensation paid depends on your age when the firm went bust.
If you are over pension age then the compensation is based on 100 per cent of your pension, but if you are under pension age compensation is based on 90 per cent of your pension. There is also a cap on the very highest earners, but that would not affect you.
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The main difference that you would see if the House of Fraser scheme ends up in the PPF is that future increases to protect against inflation may be lower.
Many pension schemes will pay you an annual increase to protect against inflation, and often this will cover your whole pension for all the time that you worked for the company.
But the PPF payment only provides inflation protection for years that you worked since 1997. As a result, the total amount of inflation protection may be lower.
PPF payments are also only linked to inflation as measured by the Consumer Price Index whereas many schemes still pay pensions linked to the generally higher Retail Prices Index.
Again, this may mean that any annual inflation increases you receive in future are lower than they would have been.
You can read more about the PPF and the protection it offers here.
In the specific case of the House of Fraser scheme there is however a slight twist which might mean that your pension is protected in a different way.
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According to the pensions press, the House of Fraser scheme was short of the money it would need to pay everyone’s pensions in full, but may have had more money than would be needed to match the benefits paid out by the PPF.
In that case, the scheme might not go into the PPF.
Instead, the money in the fund would be paid over to insurance companies who would provide guaranteed pensions at least as good – and in some cases better – than the PPF.
As a recipient of a pension you would not notice much difference, but your pension would be underwritten by an insurance company rather than the PPF.
Depending on how the balance in the House of Fraser pension scheme was allocated, it is possible that you would get a slightly better pension than from the PPF, but you will definitely not be any worse off than in the PPF.
At the moment, the House of Fraser scheme is going through something called an ‘assessment period’ where the PPF decides whether the scheme has enough money to pay benefits at least as good as PPF levels.
If it does not, then it will end up in the PPF. If it does have enough money then a deal will be done with an insurance company as described above.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.