Work and Pensions Committee chair Stephen Timms has asked pensions minister Guy Opperman to reconsider the interest on arrears and the application of the compensation cap for Financial Assistance Scheme members.
Opperman is under pressure to review compensation limits from the FAS following changes imposed on the Pension Protection Fund.
Timms has written to the minister asking him to reconsider the treatment of members of the FAS, which is now run by the PPF.
In a letter dated May 25 2022, Timms outlined issues regarding how payments have been made under the FAS and called for Opperman to review the case for changes to compensation and the potential payment of interest on arrears.
The cap on financial assistance payments applies to all members irrespective of their age. Thus, it is not affected by the Court of Appeal judgment
Guy Opperman, pensions minister
Cap’s application now ‘tenuous’
The discourse between the two MPs stems from the European Court of Justice’s 2018 ruling on the Hampshire case, which determined that members must receive 50 per cent of the value of their pension entitlement. It meant the defined benefit lifeboat fund had to repay a small number of members who had been subject to a compensation limit.
An appeal court ruling has stated that the ECJ’s decision applies to the FAS as well as the PPF’s pension benefit payments. Meanwhile, in 2020, the High Court found the PPF cap to be unlawful on grounds of age discrimination, and this was confirmed by the Court of Appeal last year.
Timms argued that the application of the cap to the FAS had “even less justification” than it did to PPF benefits. The cap had initially been applied to protect against “moral hazard”, but was now “tenuous” and likely no longer applied to any member of the FAS.
In his letter, Timms also argued that FAS members had experienced different treatment on the grounds of age, despite Opperman’s previous assertion that the cap on financial assistance payments applied to all members irrespective of their age.
In April, Opperman wrote to Timms: “The cap on financial assistance payments applies to all members irrespective of their age. Thus, it is not affected by the Court of Appeal judgment [the Hampshire case] and it is not being disapplied.”
However, Timms countered that, prior to the creation of the PPF, active and deferred pension scheme members entered into the FAS were subject to a cap on compensation, while retired members received an annuity for the full amount of their pension.
‘No legal basis’
Opperman has outlined that there is no legal basis to pay interest to FAS members. For the PPF, regulations require interest to be paid in arrears on compensation resulting from the Hampshire case.
In a letter to Timms dated April 26, Opperman said that while the PPF was applying interest payments on arrears for PPF-protected payments, FAS payments were not subject to the same rules.
He explained: “The FAS payments were correctly paid under the law as it was understood at the time. The department’s position is explained further in the publicly available staff guidance.”
Discretionary payments outside of the legal framework are only considered where there is maladministration by the Department for Work and Pensions, according to Opperman.
However, Timms argued that “this is not the case here”, citing Treasury guidance on managing public money.
“My point was that Treasury guidance on managing public money appears to provide discretion [to] do so,” he explained.
“Paragraph 4.7.3 says that ‘if there has been a lapse of time, for example caused by legal action to establish the correct position, it may be appropriate to consider paying interest’.”
Finally, Timms also urged Opperman to review how the government has used assets transferred from failed pension schemes under the FAS prior to the creation of the PPF.
Opperman previously stated that while the assets of failed schemes were transferred to the Treasury, these assets were not for the purposes of payments under the FAS.
However, Timms disputed this and cited a 2007 FAS “review of assets”, which stated that “if guaranteed assistance levels are appropriate, then we recommend that government takes in the assets and pays the amounts to all FAS beneficiaries as they fall due”.
Opperman challenged to meet Pensions Action Group
Timms’ letter is the latest in a series of correspondence between Opperman and Timms discussing the different treatment of FAS and PPF compensation payments.
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Panellists at the Pensions and Lifetime Savings Association’s investment conference have called for a revised framework for at-retirement guidance to allow trustees to give more support to members considering their options.
The FAS cap increased from £36,717 a year to £36,901 on April 1 2021, based on the inflation rate at the time. It only applied to members retiring on or after that date — members already receiving payments were not affected.
On its website, the PPF explained: “The PPF’s regulations require the compensation cap to be linked to increases in UK average earnings, whereas the FAS regulations require its cap to be linked to increases in inflation.”
As well as urging reviews of the compensation cap and interest payments, Timms has also called for Opperman to meet with members of the Pensions Action Group, a member-led organisation campaigning for changes to the FAS.
