The liquidation of the international travel group has led to thousands of layoffs.

Do Thomas Cook employees need to fear for their savings?

The collapse of an international firm is likely to have ripple effects, affecting both its current and former staff.

Much like ATOL, which is responsible for the financial protection of holidaymakers, the Pension Protection Fund offers financial assurance to individuals’ pensions, though there are loopholes in its functioning mechanism.

The first part of the equation is to identify the kind of pension you’re entitled to.

‘Defined contribution’ schemes represent the bulk of the retirement savings plan in the current employment landscape. Instead of paying a consistent income throughout retirement, people contribute to a savings account, which further receives a percentage of matching contributions from the employers.

While some may argue the financial uncertainty inherent in these contribution schemes, they have a slight edge over conventional pension schemes. As an employee, the money in the savings scheme is yours, including both the company’s contributions and your personal contributions.

It is critical to note that ‘defined contribution’ plans have gained popularity in recent years only. Earlier, employees used to contribute a portion of their income to a ‘defined benefit’ plan which was responsible for paying consistent payouts during retirement.

Since these payments come out of a fund maintained by the company, a default could have financial repercussions.

Companies use this pension fund to pay regular monthly payouts to its former employees.

The defined nature of these benefits requires companies to continue these payouts long after the staff has contributed to the plan or left the firm and often throughout retirement.

In the case of Thomas Cook, it has more than 13,000 employees listed in its defined benefit schemes.

Under normal circumstances, a company must top up this fund in case of a shortfall, at least until the company is operating.

However, the pension fund run by Thomas Cook is already £500million short, triggering worries among its participants.

The Pension Protection Fund comes to the rescue

The primary role of the Pension Protection Fund is to intervene in matters where a company running a final-salary-style pension goes bankrupt.

More than 250,000 former workers of failed enterprises are receiving pensions under the administration of the fund.

Oliver Morley, the chief executive of the Pensions Protection Fund, emphasized that this is precisely why the fund was established in the first place. Despite the fall of Thomas Cook, it is the responsibility of the fund to provide financial protection to the members of defined benefit schemes, added Morley.

More than 3,000 former employees of Thomas Cook will continue to receive their benefits as before.

However, the remaining 10,000 workers who have not reached the retirement age will have to sustain a minor cut in their benefits.

As per the rules of the Pension Protection Fund, the active working employees of the firm will receive 90% of their earlier benefits, subject to a maximum annual limit of £40,000.

On the contrary, employees with higher benefits will take the biggest haircut, losing nearly 50% of their defined benefits.

The only sigh of relief for the recipients of Thomas Cook’s final-salary-pension scheme is that there is an additional £100million in the fund which will help cover pensions through the PPF, according to a Thomas Cook spokesman.

The spokesman further added that the trustees of the travel organizer are hopeful that after the assessment, the company may not need PPF assistance and any benefits over PPF levels will be paid without the PPF’s involvement.

The trustees of the company are working closely with different parties including the Pensions Regulator and the Pension Protection Fund to protect the financial rights of the members of the Thomas Cook Pension plan and to devise a plan for the future.