DWP spends £13mn in arrears to FAS members due to court cases

The FAS was created to assist members of defined benefit schemes that were underfunded at the point of winding up, covering a period between January 1 1997 and April 5 2005.

It provides for the liabilities arising from any qualifying schemes once their assets have been transferred to the government, and is managed by the Pension Protection Fund. 

A number of recent legal cases have had implications for the FAS. For example, the European Court of Justice determined in its “Hampshire” ruling of 2018 that individual scheme members should receive at least 50 per cent of the value of their accrued benefits in the event of employer insolvency. This resulted in adjustments to FAS assistance with respect to some members.

Arrears may also be payable to members who are entitled to an increase to their assistance in respect of the Hampshire judgment

DWP

The FAS liabilities, which stood at £6.3bn at the end of March 2022, now include a 0.1 per cent loading for in-payment members, and a loading of 0.3 per cent for not yet in-payment members, “which reflect a very approximate aggregate allowance for the impact of the Hampshire judgment”, the DWP’s annual report and accounts explained. 

“This allowance will be refined in future as members’ assistance is assessed and, where required, increased for the impact of the Hampshire judgment. For some pensioner members this has already taken place and for the remainder this is expected to be carried out in 2022 and 2023.”

It added that “arrears may also be payable to members who are entitled to an increase to their assistance in respect of the Hampshire judgment”, which would be in addition to projected cash flows.

The report stated that £11mn of arrears were paid in the year to March 2022 “in respect of pensioners whose assistance has already been uplifted”.

A further £1mn is due to be paid by June 2022, and “there may be some further arrears payable in future”, to the tune of £1mn. “These are not included within the cash flow projections,” it said.

More cases, more costs

In 2020, the Administrative Court ruled in “Hughes vs PPF” that, when calculating the minimum 50 per cent value, the lifeboat fund must ensure that members receive at least 50 per cent on a cumulative basis of the benefits their scheme would have provided.

The PPF appealed aspects of this ruling, however, and in July 2021 the courts found that the lifeboat could increase payments to members following the Hampshire ruling, meaning that the figures released in the DWP’s annual report and accounts do not account separately for the increased costs of the Hughes judgment.

The Hughes ruling also found that the PPF’s compensation cap was unlawful on the grounds of age discrimination, but there has been some dispute as to whether the FAS compensation cap rises to that level.

The DWP contends that it does not, but Work and Pensions Committee chair Sir Stephen Timms has on several occasions pressed pensions minister Guy Opperman to revisit it, something he has been reluctant to do.

Finally, in 2019, the ECJ handed down its “Bauer” judgment, which ruled that it was “disproportionate” to reduce benefits following employer insolvency, where doing so would push the member below the “at-risk-of-poverty” threshold, as determined by Eurostat.

The DWP is still in the process of considering options for implementing the ruling, but its annual report and accounts explain that the FAS liabilities “include a loading of 0.8 per cent for in-payment members, and a loading of 1.7 per cent for not yet in-payment members, which reflect a very approximate allowance for the Bauer judgment”. 

“It is not possible to calculate an accurate allowance at this time,” it said.