How is your DB pension protected if your employer becomes insolvent?
The Pension Protection Fund pays compensation when a defined benefit employer becomes insolvent and the scheme cannot meet its liabilities. Members at or above their scheme's normal pension age generally receive 100% of their pension; those below it generally receive 90%. The larger cut, for most people, is what happens to the annual increases.
- The trigger: employer insolvency where the scheme is underfunded on the PPF basis.
- The levels: 100% for members at or over scheme normal pension age, 90% for those below.
- The increases: capped increases on post-April 1997 service only; earlier service is not increased.
- The reassurance: the PPF is statutory and funded by a levy on schemes, not by the failed employer.
01 What the PPF is and when it steps in
The Pension Protection Fund was created by the Pensions Act 2004 to pay compensation to members of defined benefit schemes whose sponsoring employer becomes insolvent leaving the scheme underfunded. It is financed by a levy on all eligible schemes rather than by the failed employer, which is what makes the protection meaningful.
Entry is not automatic on insolvency. The scheme goes through an assessment period, typically lasting a year or more, during which benefits are paid at PPF levels while it is established whether the scheme can secure benefits above compensation levels elsewhere. Some schemes leave assessment without entering the PPF at all.
The compensation is paid by the PPF for life. It is not an insurance payout or a transfer; it is an income that replaces the scheme pension on the PPF's own terms.
Source: Pension Protection Fund
02 The two levels, and the bigger cut underneath them
Members who have reached their scheme's normal pension age when the employer becomes insolvent generally receive 100% of the pension they were receiving or entitled to. Members below that age generally receive 90%. Ill-health and survivors' pensions have their own treatment.
The headline 90% is not usually the expensive part. PPF compensation increases each year only in respect of service earned on or after 6 April 1997, at a capped rate; service before that date receives no increase at all. For a member with twenty years of pre-1997 service, that is a pension whose real value declines every year from the moment it starts.
Over a twenty-five year retirement that erosion typically outweighs the 10% reduction several times over. It is the reason PPF protection should be read as a floor rather than as near-equivalence to the scheme pension.
Shows: PPF compensation against your scheme pension, and the real-terms value after a period without increases on pre-1997 service. Ignores: the exact PPF increase rules on post-1997 service, survivors' benefits, and any outcome other than PPF entry.
On the defaults above, the worked example shows £22,598 a year. Compensation starts at £18,000. After 20 years it is £22,598 in cash, worth about £12,512 in today's money.
Source: Pension Protection Fund
03 What this changes in planning
It changes very little that you can act on, which is the honest answer. Members cannot influence the employer's solvency, and leaving a scheme to avoid a risk that may never materialise means giving up the guarantee entirely — which is a larger and more certain cost.
Where it does matter is in how a transfer is judged. An adviser assessing a transfer out has to weigh the PPF floor as part of the downside case, and a member with mostly pre-1997 service has a weaker floor than one whose service is mostly later. That is a fact about your own record, and the scheme can tell you the split.
It also matters for expectations. A scheme in an assessment period pays at PPF levels immediately, so members can see a reduction before any final determination is made.
Source: Pensions Act 2004
The PPF is a good backstop and it is not a substitute, and the difference is the increases rather than the ten per cent. A member with two decades of pre-1997 service is looking at a pension that never rises again, which over a long retirement is a much bigger cut than the headline. None of that is a reason to transfer out — swapping a guaranteed income for market risk to avoid a possible haircut is trading a certainty for a probability. It is a reason to know your service split, because it is the single fact that tells you how strong your floor actually is.
FAQ
Will I definitely get 90% if my employer fails?
Members below their scheme's normal pension age at insolvency generally receive 90% of their pension; those at or above it generally receive 100%. Survivors' and ill-health pensions have their own rules, and the position on any historic cap is best confirmed with the PPF directly.
Do PPF payments rise with inflation?
Only in respect of service earned on or after 6 April 1997, and at a capped rate. Pre-1997 service receives no increase at all, which for long-serving members is usually a larger loss than the 90% level.
Should I transfer out to avoid PPF risk?
Rarely. Giving up a guaranteed, inflation-linked, joint-life income to avoid a contingent reduction exchanges a certain benefit for market risk. The PPF floor is an input into a transfer decision, not a reason for one.
Sources
Regulator references
- Pension Protection Fund · Pension Protection Fund · 2025The statutory lifeboat that pays compensation when a defined benefit employer becomes insolvent.Last verified: 2026-09-07
- Pensions Act 2004 · The National Archives · 2004The statute establishing the Pension Protection Fund referred to here.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.