Timms questions compensation cap on Financial Assistance Scheme

Until recently, compensation caps applied both to the Pension Protection Fund and the FAS, itself administered by the PPF. In the former case, the cap was set at £41,461 at age 65, meaning that high earners could have effectively ended up with a pension worth less than 90 per cent of their benefits.

In 2018, the European Court of Justice, in its Hampshire ruling, ruled that members must receive 50 per cent of the value of their entitlement, and in 2020 the High Court found the PPF cap to be unlawful on grounds of age discrimination, a verdict backed that same year by the Court of Appeal.

The PPF was therefore obliged to disapply the cap with respect to itself, but it is still applied to the FAS, according to Timms.

The FAS cap was increased from £36,717 a year to £36,901 on April 1 2021, a move the PPF said reflected the level of inflation over the period. It only applied to members retiring on or after that date — members already receiving payments would not be affected. 

The PPF website explains that the reason the FAS remains subject to a cap is that the PPF operates “under different regulations to the FAS”. 

“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,” it said.

Timms, however, is probing the matter further.

“Last year, the Court of Appeal ruled that the cap on compensation paid by the PPF was unlawful. The Court of Appeal also supported the PPF’s approach to increasing payments to its members and to members of the FAS, which is administered by the PPF, following the 2018 European Court of Justice judgment in the Hampshire case,” he wrote. 

“The approach to paying arrears now due is different for members of the PPF and the FAS, which is taxpayer funded and where [the Department for Work and Pensions] has more responsibility for decision-making. PPF members will receive uncapped arrears with interest paid and no time limit. FAS members will similarly receive arrears with no time limit, but no interest will be paid and a cap, not dissimilar to the one ruled unlawful for PPF members, remains in place.

“I would be grateful if you could please set out in detail to the committee the reasons for these differences and confirm whether or not the department is still in the process of finalising its approach to this case.”

LCP said last year that schemes could expect some impact of the Hampshire ruling in their levy payments, since the PPF estimated in its annual report that the future cost of removing the cap for their members would be around £200m.

“Schemes with a significant number of capped members, especially executive schemes, could see large increases in their levy bills,” the consultancy said.