Pension Scheme Wind-Up: What Happens When an Occupational Pension Scheme Closes

Occupational pension scheme wind-ups — the formal closure and dissolution of a pension arrangement — are far more common than most scheme members realise. Hundreds of schemes wind up each year in the UK, affecting both defined benefit and defined contribution members. Understanding the process, the protections available, and what action you may need to take is important for anyone with a deferred or active membership in a private sector occupational scheme.

What Is a Pension Scheme Wind-Up?

Wind-up is the formal process by which a pension scheme is terminated and its assets distributed or transferred. It is distinct from a scheme being "closed to new members" or "closed to future accrual" — both of which are common and do not involve wind-up. A wind-up means the scheme itself ceases to exist as a legal entity.

Wind-ups can occur for many reasons:

• Employer insolvency — where the sponsoring employer enters administration, liquidation, or another insolvency procedure
• Voluntary wind-up — where a solvent employer decides to close and convert the scheme to another arrangement (e.g., replacing a DB scheme with DC contributions)
• Regulatory wind-up — where the Pensions Regulator directs or allows wind-up, sometimes in schemes that have become effectively unmanageable

Defined Contribution Scheme Wind-Up

For DC schemes, wind-up is relatively straightforward. The trustees must:

1. Notify all members of the intention to wind up.
2. Offer members the opportunity to transfer their accumulated pot to another pension scheme of their choice.
3. If members do not respond or cannot be traced, transfer to a designated receiving scheme (often NEST or another master trust).

DC scheme wind-ups do not involve funding deficits in the same way as DB schemes — each member's pot is their own, and assuming the scheme has been properly administered, the money is simply moved elsewhere. Members retain all investment gains and bear all losses to date.

The main practical concern for DC members is ensuring their new receiving scheme is appropriate and that the transfer is completed correctly. Some providers charge for outgoing transfers during wind-up; check the terms of your original scheme.

Defined Benefit Scheme Wind-Up: The Funding Challenge

DB scheme wind-up is more complex. Unlike DC, a DB scheme has a defined liability — promised pensions to active, deferred, and pensioner members — and the assets must be sufficient to meet that liability. If they are not, a deficit exists, and the resolution of that deficit drives the wind-up process.

On wind-up, the order of priority for scheme assets under the Pensions Act 1995 (as subsequently amended) determines who is protected and to what degree:

1. Scheme expenses (legal, actuarial, administrative costs of wind-up)
2. Protected liabilities — pensions and benefits that must be secured at Pension Protection Fund (PPF) compensation levels
3. Pension increases and indexation above PPF minimum levels
4. Other benefits not covered at PPF compensation levels (for example, certain discretionary benefits and pension increases the scheme provided above the statutory minimum)
5. Any surplus remaining (returned to employer in limited circumstances, or used to augment benefits)

In a fully funded or overfunded wind-up, all members receive their full benefits. In an underfunded wind-up — which is the common case following employer insolvency — the allocation of insufficient assets among different priority classes is a central concern.

The Pension Protection Fund

The Pension Protection Fund (PPF) is a government-established lifeboat for defined benefit pension schemes whose sponsoring employers become insolvent with a funding shortfall. Created by the Pensions Act 2004, the PPF is funded by levies on eligible DB schemes and by the assets of schemes that enter assessment.

When a sponsoring employer becomes insolvent, the PPF begins an "assessment period" during which:

• The PPF takes over the scheme's management
• Benefits continue to be paid at PPF compensation levels
• The PPF assesses whether it is more cost-effective to pay PPF compensation long-term or to facilitate a buyout with an insurer

PPF compensation levels are not the same as full scheme benefits:

• Members who had not reached their normal pension age when the employer became insolvent receive 90% of their expected pension.
• Members who were already over their normal pension age receive 100% of their accrued pension.
• The PPF compensation cap (which had limited the compensation of younger, higher-earning members) was found to be unlawful age discrimination by the Court of Appeal in Hughes v PPF in July 2021 and has since been disapplied. The PPF no longer applies a compensation cap, and affected members have had arrears paid.
• PPF pensions increase annually at capped rates (up to 2.5% per year for most post-1997 service, no indexation for pre-1997 service).

For senior executives with large DB pension expectations, PPF entry still means a reduction to the 90% level (if below normal pension age at the insolvency date). For the majority of scheme members with more modest pensions, PPF compensation may cover most or all of their expected benefit.

Buyout: The Preferred Outcome for Members

The preferred outcome in a solvent DB scheme wind-up is a bulk annuity buyout with an insurance company. The trustee purchases annuities from an insurer — companies including Legal & General, Aviva, Rothesay Life, Just, and Scottish Widows are major players in the bulk annuity market — covering the liabilities for all scheme members. Once the buyout is complete:

• Members' benefits are guaranteed by the insurer rather than the employer or the trust.
• The scheme itself is dissolved.
• Members receive a policy statement or notification of who is now responsible for paying their pension.

A bulk annuity buyout at full scheme benefits is a very good outcome for members. Benefits are preserved at their full level, backed by an FCA-regulated insurer. In recent years, many well-funded corporate DB schemes have taken advantage of improved funding levels (driven partly by rising gilt yields) to execute "buy-in" and "buyout" transactions, effectively removing the DB liability from corporate balance sheets.

What Members Should Do During Wind-Up

If you receive notification that your occupational pension scheme is winding up:

1. Read the notification carefully. It should explain the reason for wind-up, the likely timeline, and what options are available to you.
2. Do not ignore it. Failing to respond to transfer offers or option exercises can result in your benefits being transferred to a default receiving scheme that may not be optimal for you.
3. Consider your transfer options. You may be offered a transfer value. For DB wind-ups, this should be accompanied by regulated financial advice (if the CETV is £30,000 or more). The transfer value offered during a wind-up may be calculated differently from the typical CETV.
4. Check PPF eligibility. If the employer is insolvent, confirm whether the scheme has entered PPF assessment. The PPF website allows members to check the status of their scheme.
5. Update your contact details with the scheme administrator, PPF, or the insurer (in buyout cases) to ensure you can be reached throughout the process.
6. Seek independent advice if your expected pension is significant, particularly if you would face the reduction to the 90% compensation level or if there are concerns about the funding position.

Defined Benefit Schemes: Member-Nominated Trustees

During wind-up, the trustee board — which should include member-nominated trustees — has a duty to act in members' interests. If you have concerns about the conduct of a wind-up (e.g., trustee conflicts of interest, delays, or failure to communicate with members), you can raise concerns with:

• The Pensions Ombudsman
• The Pensions Regulator

The Pensions Regulator has the power to appoint independent trustees to schemes under wind-up where governance concerns arise.

Employer Debt on Wind-Up

When a DB scheme winds up with a deficit and the employer is solvent (i.e., not insolvent), the "Section 75 debt" provisions require the employer to pay into the scheme an amount equal to the full buyout deficit — the cost of securing all benefits with an insurer. This is a much larger figure than the "technical provisions" deficit used in regular actuarial valuations, and can represent a substantial liability for the employer.

Section 75 debt obligations can lead to protracted negotiations between employers, trustees, and the Pensions Regulator before a wind-up is completed.

Compliance note: Pension scheme wind-up rules, PPF compensation levels and caps, and the legislative framework described in this guide are correct as at June 2026 and are subject to change. Wind-up is a complex area of pensions law, and this guide is necessarily a summary of a highly technical process. This guide is for information only and does not constitute regulated financial or legal advice. Members facing a scheme wind-up are strongly encouraged to take independent financial and legal advice specific to their circumstances.

How Global Investments Can Help

If you are a member of an occupational pension scheme that is winding up — whether through a bulk annuity buyout or PPF entry — Global Investments can help you understand the implications for your retirement income, assess any transfer value offers you receive, and integrate the outcome into your broader retirement plan. We work with both UK-resident and internationally mobile clients who hold deferred benefits in UK occupational schemes. Contact us to discuss your situation.