In 2018, in Hampshire v the PPF, the CJEU decided that the EU Insolvency Directive (“the Directive”) requires Member States to guarantee that each individual employee, without exception, receives compensation corresponding to at least 50% of the value of their accrued entitlement under their occupational pension scheme (“the Guarantee”).
In Hughes vs PPF, the High Court has now ruled on a challenge brought against it following the CJEU’s ruling in Hampshire. The case concerned several matters in relation to PPF compensation, including the application of the compensation cap and the PPF’s proposed method for ensuring its compensation addresses the Guarantee.
The PPF provides compensation at two levels: 100% or 90%. Pension scheme members who are only entitled to receive 90% compensation are also subject to the compensation cap (set at £41,461 for 2020/21. Once the cap is applied, this equates to £37,315 for a member retiring at 65).
The level of benefit payable depends on the pension scheme member’s circumstances immediately before the assessment date (generally, the date the scheme applies for PPF entry) and the pension scheme’s rules.
Pensioners who are over the scheme’s normal pension age (“NPA”) at the date of assessment or who retired early on ill-health grounds receive 100% compensation (subject to the increases rules, see below). Other pensioners, actives and deferreds are entitled to 90% of the pension they had accrued (including revaluation) immediately before the PPF assessment date (subject to the PPF’s review of the scheme’s rules) plus revaluation between the assessment date and the date compensation payments start. Revaluation is subject to a cap of 5% in respect of service from April 1997 to April 2009, and 2.5% in respect of service thereafter.
No increases are provided in respect of pensionable service prior to 6 April 1997 and compensation that is derived from pensionable service on or after that date is only increased each year in line with CPI capped at 2.5%.
With effect from 6 April 2017, the PPF introduced changes to the compensation calculation for those with long service. The compensation cap increases by 3% for each full year of pensionable service above 20 years (ie 21 years or more), up to a maximum of twice the standard compensation cap.
Among other matters, the court considered whether:
The claimants were members (or, in two cases, the surviving spouses of members) of one of four pension schemes whose employer became insolvent. There was evidence that their pension benefits had been significantly impacted by both the compensation cap and the application of PPF (as opposed to scheme) level increases.
As the imposition of the compensation cap involves differential treatment on the grounds of age, it was for the court to determine whether it was an appropriate means of achieving a legitimate aim, ie whether it could be objectively justified.
A DWP policy note from November 2003 explained that the 90% protection level and the compensation cap were designed to combat “moral hazard”. That is, if the PPF provided full protection, company decision-makers and trustees would be less concerned to ensure that their scheme was properly funded as members would receive their full pensions in any case. The cap was considered to have a “crucial additional impact” as it would “bite on relatively high earners many of whom will be in a position of influence within the company”. It was not considered appropriate to apply the cap to those who had already reached NPA as they had less opportunity to make up any loss and had adjusted to a certain level of income in retirement. Considerations of cost was also an aim identified at the time the measures were enacted.
Mr Justice Lewis concluded that, while these aims were legitimate, the cap was not an appropriate means of achieving them, as it resulted in a significant reduction to the benefits of a small group of workers (up to 0.5% of present and anticipated pensioners whose schemes enter the PPF are affected by the cap) and that this remained the case even with the mitigation afforded by the Guarantee and the changes to the cap for those with long service.
Method of achieving 50% compensation
The judge considered that the Guarantee is intended to ensure that, over time, the compensation that a member (including a survivor) will receive will be equal to 50% of the benefits that they would have received under the rules of the pension scheme. However, “the case law stops short of prescribing the method by which that result is to be achieved”.
Mr Justice Lewis found that the PPF was entitled to devise its own method for providing compensation in accordance with the Guarantee. The key is that the chosen system must be able to ensure that the “cumulative level of compensation paid” over the lifetime of the pensioner (including a survivor of a member) did not fall below the Guarantee.
The judge decided that a claim against the PPF for arrears of compensation payable under the Pensions Act 2004 which result from underpayment due to the application of the compensation cap is subject to a six-year limitation period under the Limitation Act 1980.