On 22 June 2020, the High Court handed down its much-anticipated judgment in Hughes and others v The Board of the Pension Protection Fund. While the High Court confirmed that the method the Pension Protection Fund (PPF) is using to make sure that each member has PPF compensation of at least 50% of the value of their original scheme benefits is permissible, it also ruled that the PPF compensation cap was unlawful. What does this judgment mean for defined benefit pension schemes?
On 6 September 2018, the Court of Justice of the European Union (CJEU) handed down its judgment in Grenville Hampshire v The Board of the Pension Protection Fund. The CJEU ruled that:
- Article 8 of the EU Insolvency Directive (which requires Member States to take the necessary measures to protect the pre-insolvency occupational pension scheme rights of employees and former employees whose employer becomes insolvent) has direct effect as against the PPF.
- PPF and Financial Assistance Scheme (FAS) compensation must provide each individual member with at least 50% of the value of their pre-insolvency pension scheme benefits.
Since 2018, the PPF has published a series of updates on the steps it has taken to implement the CJEU’s ruling in the Hampshire case.
The method the PPF has used to adjust benefits involves comparing the actuarial value of the benefits (including survivors benefits) that would have been payable to a member under their original pension scheme, with the actuarial value of their PPF or FAS compensation. If the value of the PPF or FAS compensation is less than 50% of the value of the original scheme benefits, a one-off adjustment is made to bring the PPF or FAS compensation up to the 50% threshold.
One feature of PPF compensation, which has resulted in some members being entitled to an uplift, is the “compensation cap”. Members who are under their scheme’s normal pension age on the date the scheme enters a PPF assessment period are only entitled to PPF compensation of 90% of a capped amount. This capped amount (the compensation cap) is £41,461.07 for 2020-21.
The judicial review
Mr Hughes and a number of other claimants (including Mr Hampshire) applied for judicial review of the method the PPF has been using to adjust members’ benefits for the Hampshire decision. They argued that, instead of doing a “one-off” calculation to check whether the 50% requirement was met (which could result in a member receiving compensation of more than 50% in earlier years and less than 50% in later years and involved making a series of assumptions, for example, about how long a member would live), the PPF should run a check each year. They also argued that the compensation cap (which only applies to members who have not reached their scheme’s normal pension date on the day the scheme enters a PPF assessment period) amounts to unlawful age discrimination.
The High Court has ruled that:
- The PPF compensation cap amounts to unlawful age discrimination and has done since it was first applied in 2005.
- In reviewing benefits to check that the 50% threshold is met, the PPF can use a “one-off” calculation method and then “pay out the compensation due as a result of that calculation over the period of the pension”, even if this involves “paying more than 50% in some years and less in others provided that, overall, the cumulative level of compensation paid does not fall below 50% of the value of the benefits that would have been paid under the scheme over the lifetime of the pensioner”.
- However, the PPF must provide “50% of the actual value, over time, of the benefits not 50% of the actuarially predicted value”. As such, if there is any possibility that the PPF’s method could result in members receiving less (for example because the member lives longer than has been assumed), it will need to have a way of “identifying and dealing with that eventuality”.
- The PPF must also review the methodology to ensure it protects at least 50% of the value of survivors’ benefits (pension and lump sum) under a member’s pension scheme, if this is more than 50% of the PPF compensation being paid to the member at the date of death.
- Although the compensation cap has been unlawful since 2005, a six-year limitation period will apply to any claim against the PPF for compensation that has not been paid because of the cap. In practice, the PPF has suggested that when it reviews benefits for the 50% threshold, it will pay any arrears back to September 2012: 6 years before the Hampshire decision.
- The question of how limitation will apply to any other payment needed to ensure the 50% threshold has been met will need to be considered separately. Although it is not discussed in the judgment, we wonder if one example might be where PPF compensation is below the 50% threshold because the member’s scheme provided increases on pre-1997 pension (which PPF compensation does not). Would the member only be entitled to arrears for the last six years?
The High Court also ruled that, during a PPF assessment period, trustees “may pay out of the scheme’s assets amounts no more than the Board would pay if it assumed responsibility, that is, the amounts in Schedule 7 to the [Pensions Act 2004], and in addition, amounts required to ensure that the statutory compensation meets the guarantee required by Article 8 of the Directive.”
Open Trustees comment
It is not clear whether all or part of the judgment will be appealed. The PPF’s initial comments on the judgment can be read here.
The decision about the method adopted by the PPF to implement the Hampshire decision suggests that, with some adjustments, it will be able to continue its review and correction process.
The decision on the PPF compensation cap could have wider implications. The evidence in the case was that the compensation cap only affects a small proportion of members, but has a serious impact on the benefits of those members. An important point here is that the decision only relates to the cap itself (£41,461.07 for 2020-21), and not to the 90% limit. If the decision stands, any member who was under their scheme’s normal pension age on the date the scheme went into a PPF assessment period will still only receive 90% of their benefits.
A final point is that this decision does not just affect the PPF. It has implications for the trustees of schemes in a PPF assessment period: it suggests they should be paying benefits in line with the Hampshire decision instead of the current PPF compensation rules set out in legislation. The trustees of schemes in an assessment period, or of schemes which are preparing for a PPF+ buy out, should discuss the High Court’s decision with their legal advisers.
If you would like further advice on anything covered in this update, please contact Jonathan Hazlett or Joe Webster, whose contact details are below.
Open Trustees Limited, a member of the PPF’s Trustee and Support Services Panel, is appointed by the PPF to act as trustee of schemes that have entered a PPF assessment period. Open Trustees is also on the Regulator’s list of approved trustees. If you would like any further information on Open Trustees or would like to consider them for an appointment, please contact the Managing Director, Jonathan Hazlett, using the details below
Additionally Osborne Clarke LLP, a sister company to Open Trustees Limited, is a member of the PPF’s Legal Panel providing legal advice in all areas to the PPF and specialist pensions law advice jointly to the PPF and trustees of schemes that have entered a PPF assessment period.