Part 3 – Hughes v Pension Protection Fund (“PPF”) – Battle Lines Drawn in PPF Compensation Case
21 / 09 / 2020
On 20 August 2020, battles lines were drawn and appeals lodged in the Hughes judicial review litigation.
The PPF’s appeal concerns its approach to the requirement for members to receive 50% of the value of their entitlement, how to deal with survivors’ benefits and how to apply PPF benefits pending judgment in the appeal. Separately, the Department for Work and Pensions (DWP) has appealed against the ruling that the Compensation Cap is unlawful.
If a scheme falls within the PPF on an employer insolvency, members receive compensation equal to 100% of their scheme pension if they have reached normal pension age, whereas if they have not yet reached normal pension age, then:
- members receive compensation equal to 90% of their scheme pension;
- compensation is capped at an amount reviewed annually (£41,461.07 at age 65 for 2020-21) (“Compensation Cap”); and
- pension increases are capped at the lower of 2.5% or the rate of inflation for increases to benefits from 5 April 1997,
which can mean that some members may receive less than 90% of their scheme pension.
In September 2018, the Court of Justice of the European Union (“CJEU”) ruled in Hampshire that the EU Insolvency Directive required PPF compensation to be at least 50% of members’ accrued scheme benefits. The PPF then started applying a “one-off” value test as opposed to, for example, tracking benefits on a “year by year” basis.
In May 2019, the PPF breathed a sigh of relief when the CJEU ruled in the further case of Bauer that the PPF would not have to guarantee 100% of scheme benefit levels.
The Bauer respite for the PPF was short-lived. In June 2020, the High Court in Hughes held that in relation to members under normal pension age:
- the Compensation Cap amounts to unlawful age discrimination;
- the PPF’s general approach of using a “one-off” calculation method (even if it meant that more than 50% is paid in some years and less in other years) was approved, provided that, overall, the cumulative level of compensation paid does not fall below 50% of the value of scheme benefits over the pensioner’s lifetime;
- however, the PPF must provide 50% of the actual value of the benefits, not 50% of the actuarially predicted value as per the PPF’s method;
- the PPF’s approach to the value of any survivors’ benefits and then paying the survivor half of the members’ benefits was not approved because scheme specific rules may allocate survivor benefits on a different (possibly higher) basis;
- claims to the PPF to pay arrears of PPF compensation were subject to a six-year limitation period; and
- for schemes in a PPF assessment period, trustees must ensure sums paid to members do not exceed the compensation that would be payable by the PPF.
One of the main policy concerns the DWP has with Hughes is that the Compensation Cap helps ensure a disproportionate sum of levy payers’ funds is not used to fund the retirement income of some of the highest earning pensioners that make up a minority of PPF members. It is, therefore, perhaps unsurprising that the lawfulness of the Compensation Cap has been appealed by the DWP.
There are at least a couple of points from the Hughes judgment that may reassure the PPF:
- Firstly, the decision relates only to the lawfulness of the Compensation Cap, not the 90% limit. The Court accepted that PPF compensation being lower than scheme benefits would help to deter employers from dumping scheme liabilities on the PPF.
- Secondly, the judge has suggested that the PPF may not, in fact, need to make major changes to its proposed method to give effect to the judgment.
It would seem that, ultimately, there might be light at the end of the tunnel for the PPF, but the PPF is not out of it yet. The Appeal Court has to decide whether the appeals can proceed and, if they do, the actual appeals are unlikely to be heard until 2021. The tunnel could be extended if there are onward appeals to the Supreme Court.
Meanwhile, the PPF has said it will continue to apply the Compensation Cap and seeks permission to delay any PPF compensation calculation changes until completion of the appeals process. Finalisation will not be speedy for anyone, unless TPR and DWP are refused permission to appeal.
This article is for general information only and does not seek to give legal advice or to be an exhaustive statement of the law.
This article was originally published in Pensions Age and can be found here.