PPF v Hughes (Court of Appeal, 19 July 2021)

In the latest instalment in a string of cases that have challenged the way that PPF compensation is calculated and applied, the Court of Appeal has ruled that the PPF’s approach to increasing compensation following a CJEU decision is lawful, but that the imposition of the compensation cap constitutes unlawful age discrimination.

Background

PPF compensation

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 2021/22). 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 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.

The journey to the Court of Appeal

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, among other matters, the High Court found that:

• the PPF’s compensation cap amounts to unlawful age discrimination
• the PPF’s method for ensuring that its compensation meets the Guarantee did not comply with the requirements of Article 8 of the Directive, as interpreted by the CJEU in Hampshire. Its use of a one-off calculation meant there was a possibility that some scheme members might ultimately receive less than 50% of their original entitlement. The system needed to have a way of identifying and dealing with that eventuality; absent such a checking mechanism, it was unlawful.
• the PPF’s approach to survivor’s benefits was unlawful. Survivors must receive compensation equivalent to at least 50% of the value of the survivors’ benefits under the original scheme of which the employee (whose survivor they are) was a member.

On 19 August 2020, the PPF announced that it would be asking for permission to appeal:

• the approach to meet the requirement for members to receive 50% of the value of their entitlement, and
• how survivors’ benefits should be dealt with.

The DWP also lodged an appeal against the decision that the use of the compensation cap constitutes unlawful age discrimination.

Judgment

The Court of Appeal:

• found in favour of the PPF’s approach to increasing compensation payments to PPF and FAS members following Hampshire
• agreed with the High Court that the imposition of the compensation cap constitutes unlawful age discrimination.

It is worth noting that, as there was no challenge to the PPF’s assumptions, the court expressed no view on these.

Next steps

The DWP has until 30 July 2021 to appeal the decision as to the legality of the compensation cap. Further, the period of time over which the cap would need to be disapplied is not yet clear and we understand the Secretary of State for Work and Pensions has asked for more time to address the Court on this issue.

The PPF has said that it will provide more information on the implementation of the judgment as soon as it is able. For now, it intends to continue to pay members their current level of benefits.