The Department for Work and Pensions has seen its appeal on the Pension Protection Fund cap, previously considered discriminatory by the High Court, dismissed by the Court of Appeal, which means the pensions lifeboat will have to alter its benefits structure.
UK law established that 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 when they are transferred into the PPF.
But there is a cap on the total amount to be paid each year, currently set at £41,461 at age 65, which means that high earners could have effectively ended with a pension worth less than 90 per cent of their benefits.
The government had appealed a High Court decision issued in June 2020, where Mr Justice Lewis determined the cap was unlawful, enabling capped members to claw back up to six years’ of underpayments.
It is to be hoped that this judgment will bring some final resolution on key issues and that those who have been underpaid will now get what they are due as a matter of urgency.
Steve Webb, LCP
The cap had already been implicated in another landmark legal challenge, known as the Hampshire case, in which the Court of Justice of the European Union 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.
However, the judge went further in his judgment last year, arguing that the cap itself – which is applied to members who have not yet reached normal retirement age – is discriminatory on the grounds of age.
In its decision issued on Monday, the Court of Appeal judges – Lady Justice Asplin, Lord Justice Green and Lady Justice Elisabeth Laing – allowed the DWP’s appeal on grounds of age discrimination, but agreed with the original judgment, dismissing the appeal.
The judges stated that the PPF is instead entitled, if it chooses to do so, “to adopt a scheme which involves a one-off calculation, and then to pay out the compensation due as a result of that calculation over the period of the pension”.
The judges noted that it might “involve paying more than 50 per cent in some years and less in others provided that, overall, the cumulative level of compensation paid does not fall below 50 per cent of the value of the benefits that would have been paid under the scheme over the lifetime of the pensioner”.
However, it is not clear when the change to the PPF’s benefit structure will have to be made, “and as such, the secretary of state for work and pensions has asked for more time to address the court on this complex legal issue”, a PPF spokesperson stated.
PPF wins two appeals
Besides the DWP, the PPF itself had also submitted two appeals regarding its compensation calculations following the Hampshire ruling, which were granted by the Court of Appeal.
In the High Court judgment last year, Justice Lewis stated that the lifeboat’s approach to calculate the benefits uplift due to members affected by the Hampshire ruling was unlawful, since having a “one-off calculation meant there was a possibility that some scheme members might ultimately receive less than 50 per cent of their original entitlement, and the system needed to have a way of identifying and dealing with that eventuality,” which was not introduced.
In Monday’s ruling, the Court of Appeal judges concluded that it “is lawful for the PPF to perform a single, ex ante, calculation”.
The judge also determined that the pensions lifeboat’s approach to survivors’ benefits was unlawful, and that these individuals should “receive compensation equivalent to at least 50 per cent of the value of the survivors’ benefits under the original scheme”.
The Court of Appeal once again sided with the PPF, determining that there is no basis “to suggest that the accrued entitlement is divisible and that each element should be valued and treated separately”.
Pilots in line to receive £35m in extra benefits
The British Airline Pilots’ Association, one of the claimants in the case, has called the latest decision a “major legal victory”, potentially worth a total of more than £35m for 170 Balpa members, if they are entitled to receive 90 per cent of their expected pension under their original defined benefit scheme with no cap applied.
The pilots’ union launched its campaign for the removal of the cap when ex-BMI and ex-Monarch members were left severely out of pocket when their pension schemes entered the PPF, it said.
John Moore, head of industrial relations at Balpa, said: “This is an important victory for Balpa and great news for pilots, many of whom were expecting to lose more than 50 per cent of their pension as a result of the PPF compensation cap.
“We have written to the secretary of state for work and pensions, Thérèse Coffey, asking the government not to appeal and to do the right thing — draw a line under this long-running issue and start processing the compensation increases our members are entitled to receive.
“We expect all pilots subject to the cap will now receive 90 per cent of their expected scheme pension.”
PPF must not cut pensions by more than half, EU court rules
The Court of Justice of the European Union has ruled that the cap imposed on benefits paid by the Pension Protection Fund is unlawful when it reduces the payments made to a saver by more than half.
Pension specialists are also expecting this judgment to be the end of a long-standing court battle.
Former pensions minister Sir Steve Webb, now partner at LCP, said: “Issues around PPF compensation and the compensation cap have been going through the courts for many years now and the members affected are getting older.
“It is to be hoped that this judgment will bring some final resolution on key issues and that those who have been underpaid will now get what they are due as a matter of urgency.”
