Legal review raises questions over PPF assessment period

Exempting certain pension benefits from age discrimination laws has been ruled incompatible with European law, leaving some schemes open to the prospect of discrimination claims and remedial payouts.

Article 3 of the Equality Act (Age Exceptions for Pension Schemes) Order 2010, "insofar as it authorises a restriction of pension payments related to rights accrued, or benefits payable, in respect of the claimants’ periods of pensionable service prior to December 1 2006", was deemed incompatible with Council Directive 2000/78/EC and was disapplied.

Seventeen claimants at a January 2022 employment tribunal hearing argued that by reducing or capping their pension payments, the T&N Retirement Benefits Scheme had treated them less favourably due to their age.

It is likely that affected schemes, and the PPF, will not welcome the additional cost, complexity and uncertainty given the possibility of further decisions on this issue, which the ruling leaves in its wake

John Gordon, Ashurst

The case follows a 2018 ruling from the European Court of Justice, which determined that PPF members should not receive less than 50 per cent of their entitled benefits in the event of the insolvency of their employer.

The January 2022 tribunal disapplied Article 3 of the Equality Act, deciding that it was incompatible with a European directive on discrimination. Employment tribunal decisions, however, are not binding on the courts.

Ashurst counsel John Gordon said that the decision “is a further challenge to the law governing PPF compensation, and may mean that schemes cannot continue to restrict the amount of benefits paid during a PPF compensation period”. 

The Department for Work and Pensions is understood to be appealing the decision. “We do not comment on live litigation,” a DWP spokesperson said.

Remedies for ‘injury feelings and interest only’

The claimants, with the exception of one — a widow of a contributing member to the scheme - had left pensionable service, with benefits entering payment before January 31 2005. 

The following year, the sponsoring employer entered a company voluntary arrangement. Its scheme remains in assessment for entry into the PPF. In October 2011, the employer secured a bulk annuity contract with Legal & General, insuring its benefits to just above the PPF compensation level.

The Pensions Act 2004 limits pension payments for schemes at the start of their PPF assessment period so that they would not exceed the lifeboat fund’s compensation level, even without being under the responsibility of the PPF at this stage. 

The pensions lifeboat will pay 90 per cent of a scheme member’s benefits if they have not reached the normal retirement age of the scheme at the time it enters a PPF assessment period. Pensioners receive 100 per cent of their benefits.

The claimant’s benefits were reduced accordingly from July 10 2006, when the assessment period began.

20-20 Trustee Services, which acts as the trustee for the T&N scheme, said that it has and continued to recalculate these benefits and has agreed to uplift the payments and repay the money owed.

One of the claimants, Mr Hampshire, had previously challenged the PPF’s compensation cap, arguing that the reduction of his benefit to less than 50 per cent of his accrued rights was unlawful. 

There was a cap on the total amount to be paid each year, which stood at £40,000 at age 65 before being removed.

The PPF’s compensation cap was subsequently found to be unlawful. An interim solution, known as the “Hampshire uplift”, was applied. 

The PPF’s methodology for the uplift was then challenged and, in July 2021, the Court of Appeal found that the legislation concerning the application of a cap in calculating PPF compensation payable to those who were not at or over normal pension age when a scheme entered its assessment period amounted to unlawful age discrimination.

If this decision is upheld, it will mean schemes need to review pre-2006 benefits which they may not have considered previously when undertaking age discrimination reviews

Vikki Massarano, Arc Pensions Law

The cap was removed and T&N’s trustee is recalculating the benefits in a measure known as the “Hughes uplift”. While it has agreed to pay these arrears, they have not been paid, with the trustee saying its cash reserves are insufficient to cover them for more than a limited period.

In August 2021, Mr Beattie — one of the claimants in the January case — and others lodged a claim against the employer and its scheme trustee arguing that their reduced compensation amounted to illegal age discrimination.

In October 2021, this claim was consolidated by two earlier claims brought by Hampshire and another claimant in 2019.

“The remedies sought by the claimants are declarations, recommendations and compensation,” the court said.

Given the employer’s agreement to pay and to backdate the Hampshire and Hughes uplifts, “the financial remedies sought by the claimants are likely to be for injury to feelings and interest only”, it added.

The outcome of the case may nevertheless reconfigure how the PPF must structure its compensation, the significance of which could lead to it being heard at a higher court, one legal expert said.

Additional cost for the PPF?

A European Council directive that lays down a general framework against discrimination was implemented in the UK in December 2006, initially by the Employment Equality (Age) Regulations 2006.

These rules were replaced by the Equality Act 2010, which mandated non-discrimination rules for occupational schemes. 

A separate equality act order included a time limit from December 1 2006, which stated that it was not a breach of non-discrimination regulations to have “rules, practices, actions or decisions as they relate to rights accrued, or benefits payable, in respect of periods of pensionable service prior to December 1 2006 that would breach the non-discrimination rule”.

The trustee’s legal representation, led by K Bryant, observed that the claimants had left pensionable service, their pensions had come into payment, the PPF assessment period had begun, and the requirement to lower their benefits had all taken place before the framework directive came into force in December 1 2006.

Bryant argued that the accrued right in issue in this case was the right to receive benefits in line with the Pensions Act 2004 during a PPF assessment period, which began in July 2006 and, crucially, before the December 1 2006 cut-off.

Judge Walker, however, concluded that the situation had not been fixed before December 1 2006, and that the claimants and the trustee had an ongoing legal relationship after the rules were applied. 

As there was an ongoing relationship, the “principle of future effects” applies, the judge said, with the new rules applying immediately to the situation that emerged under the older rules.

“The point of unequal treatment occurs at the time that the pension fails to be paid, not the date when it accrues,” Judge Walker said. 

The judge rejected Bryant’s argument that the PPF cap represents a separate right, responding that it constitutes a restriction on the benefits payable according to the scheme rules.

The decision is not expected to affect the majority of benefits payable from schemes, which will still fall within a specified exemption, a Hogan Lovells blog post read.

“Nevertheless, the case raises concerns that other benefits not within an exemption may be the subject of challenge in respect of pre-December 2006 pensionable service,” it said.  

“Case law concerning guaranteed minimum pensions suggests that no limitation period would apply in a claim against a funded scheme, meaning that trustees could not rely on the passage of time to defeat a claim.” 

Ashurst’s Gordon said: “The decision may also have a wider impact, as it may require pension schemes to revisit their rules and historic practices to ensure they comply with age discrimination rules.

“While the decision will be applauded by scheme members, it is likely that affected schemes, and the PPF, will not welcome the additional cost, complexity and uncertainty given the possibility of further decisions on this issue, which the ruling leaves in its wake.”

A preliminary hearing was set for March 22 2022, with an outcome currently unavailable. The main hearing has been set for November 2022, and it is understood that the DWP’s appeal will take place before November.

“If this decision is upheld, it will mean schemes need to review pre-2006 benefits which they may not have considered previously when undertaking age discrimination reviews,” said Arc Pensions Law partner Vikki Massarano.

“The PPF would need to further review its compensation structure, which could in turn lead to a need for higher levies from DB schemes,” she continued. 

“If the PPF has to provide higher compensation for some members, that will also have a knock-on effect on schemes’ PPF funding levels.”

However, the T&N Retirement Benefits Scheme and the PPF has rebutted that this case is related to the lifeboat's compensation structure. 

Martin Collins, trustee director at 20-20 Trustee Services, said: "This claim is about how the T & N Retirement Benefits Scheme (1989) compensates members for disapplying the PPF compensation cap for its members. We have already paid the claimants what we believe they are owed in law.

"The claim is for additional interest on arrears and for injury to feelings as a result of following historic legislation. It’s a narrow claim against the scheme rather than the PPF and is not challenging the structure of PPF compensation.”

A PPF spokesperson said: "While we won’t comment on ongoing proceedings to which we are not a party, we can confirm the current structure of PPF compensation is not in dispute in this case.

"The tribunal’s decision relates to a jurisdictional issue concerning Article 3 of the Equality Act (Age Exceptions for Pension Schemes) Order 2010 which only applies to occupational pension schemes. Our compensation regime is set out in legislation and is not subject to this same rule."

The headline of this article has been updated to clarify that its concerns the PPF's assessment period.