News | January 24, 2019

PPF compensation caps ruled unlawful

In September 2018, the Court of Justice of the European Union (the “CJEU“) ruled that every occupational pension scheme member must receive at least half of their accrued old age benefits if their employer becomes insolvent. This case was brought against the Pension Protection Fund (the “PPF“) which was set up in 2009 to provide top-up payments to  members where pension schemes are unable to pay members’ benefits. From 2004 to 2009, this role was undertaken by the Financial Assistance Scheme (the “FAS“) which continues to pay compensation to certain pension scheme members.

Annual PPF compensation for pension scheme members yet to reach normal retirement age is currently capped at £35,105.56 for 2018/2019. On top of this, the PPF does not pay inflation-linked increases on pension accrued before 1997 regardless of the increases that would have been due under the rules of the original pension scheme. These caps mean that high earners and those with substantial service before 6 April 1997 can see their pension cut by more than half if their pension scheme falls into the PPF. The cap on FAS compensation operates in broadly the same way.

This was the case for Grenville Hampshire, who brought the case against the PPF. Mr Hampshire retired at the age of 51 in 1998 on a pension of £48,781.80 per year. His employer became insolvent in 2006, at which point Mr Hampshire was still yet to reach his scheme’s normal retirement age. The scheme was underfunded and was taken over by the PPF, which paid compensation to the scheme members including Mr Hampshire. Because Mr Hampshire hadn’t reached normal retirement age, the caps described above were applied to his pension benefits and his pension compensation was set at £19,819 per year. Mr Hampshire calculated that he had lost out on over 67% of his pension, taking into account the annual cap plus the loss of pension increases for pension accrued before 6 April 1997.

The CJEU’s ruling has direct effect in the UK, meaning that it has immediate impact without the need for the government to legislate. The ruling did not specify the method that the PPF and FAS should use to ensure that all members receive at least half of their accrued benefits, but it was clear that this protection applies on a member by member basis so a blanket policy of capping benefits at a certain level is unlikely to satisfy the requirements.

Working out whether the 50% policy is met is complicated, because it involves a review of each member’s original scheme rules – which may not be readily available depending on the time lapsed since the scheme fell into the PPF.

The PPF set out its way forward in a methodology statement published on 21 December 2018. The PPF said it is likely to need to gather more information about members’ original schemes, but aims to conclude the process of comparing PPF benefits against original scheme benefits by the end of April 2019. The next step will be to consider whether the 50% policy is breached for all PPF and FAS capped members and the expected timeframe for this is summer 2019. The PPF will then consider how it will handle all remaining members. Alongside this, the PPF is working with schemes in assessment (meaning they may be taken over by the PPF) as to how affected members’ benefits should be calculated.

Arrears plus interest will be paid to members whose pension compensation has fallen below the 50% threshold (but time limits on the arrears may apply). In the case of the PPF, these additional costs will be borne by the PPF levy paid by employers. However, it will comfort employers that estimates suggest only around 1% of PPF’s 400,000-odd members are affected and the ruling has increased the PPF’s liabilities by a maximum of 1%.