PPF must not cut pensions by more than half, EU court rules

The decision will likely see an increase in the lifeboat’s liabilities, although Pensions Expert understands that less than 1 per cent of the fund’s members will be entitled to an uplift.

It will however have to rethink its current benefit structure. Pensions paid by the PPF are subject to both a universal haircut and a cap set by the Department for Work and Pensions.

In some circumstances, even 50 per cent might not be enough

Tim Smith, Herbert Smith Freehills

The cap currently sits at £39,006.18, leading to a benefit of £35,105.56 when the 90 per cent cut is applied.

In the case of Mr Hampshire, a well-paid former employee of defunct manufacturing business Turner and Newall, the cap and cut reduced his benefit by 67 per cent.

The non-payment of inflation-linked increases for pensions accrued before 1997 mean he currently receives around 25 per cent of his original entitlement.

UK flouts EU directive

Reductions of more than 50 per cent bring the UK’s system into conflict with article 8 of a 2008 EU directive, which has previously been interpreted to say that pension lifeboats must cover at least half a member’s benefit.

As was foreshadowed by an advocate general ruling earlier this year, the CJEU followed this interpretation in Grenville Hampshire v The Board of the Pension Protection Fund. The PPF will now have to apply the 50 per cent threshold test on a case by case basis.

The judgment also required the PPF to measure its reduction against the full benefit promised by the solvent scheme, raising the possibility that some PPF members may now be paid pre-1997 increases.

A PPF spokesperson said the lifeboat would consider the impact of the judgment, and added: “We have already been in discussions with the [DWP] about what changes to PPF compensation and [Financial Assistance Scheme] assistance will now be required.”

The spokesperson said: “We will work to implement the judgment as quickly as possible but first need to consider the judgment further to understand what action we can take prior to legislative change and the conclusion of the UK court proceedings,” adding that members will be updated as soon as possible.

A DWP spokesperson said the government respects the decision and along with the PPF would be “carefully examining the judgment to determine precisely how best to implement it”.

Members rejoice

The ruling was welcomed by campaigners, including former pensions minister Ros Altmann and the Pensions Action Group, which deals primarily with shortcomings of the FAS.

The FAS was set up to compensate members of schemes that became insolvent before the creation of the PPF in 2004, and is also covered by the judgment. Like the PPF, it does not pay increases on pensions accrued before 1997.

Terry Monk, a PAG member who has seen the value of his pension paid by the FAS fall below the 50 per cent threshold, welcomed the ruling: “I’m delighted, but it shouldn’t have taken so long.”

He said he was particularly encouraged by the court’s reference to the value of their accrued benefits under the scheme.

“That’s potentially quite significant because the value of the pension includes the value of pre-97 service,” he said. Members who accrued most of their benefits before 1997 can see their pensions eroded by inflation even if they are not affected by the cap, so the 50 per cent threshold will act as a floor on this.

Remedies not straightforward

Once the decision has been put into UK law by the Court of Appeal, the PPF and government will be faced with a series of thorny issues, according to legal experts.

One such question will be whether pensioners receiving less than 50 per cent of their benefits will be compensated for past losses, or merely see their benefit brought back in line with the new threshold.

“What the opinion is saying is that this is how the directive should have applied from the beginning,” said Angela Sharma, senior professional support lawyer at Taylor Wessing. “It would seem that there is going to have to be a sort of compensatory element.”

Questions also remain over how so-called PPF-plus deals will be impacted. Schemes could theoretically have bought out benefits at a level marginally above that guaranteed by the PPF, when they should in fact have transferred to the lifeboat. Mr Hampshire was in one such scheme.

It is also a sticking point for schemes currently winding up at PPF-plus levels.

“When they are trying to assess whether they are eligible for PPF entry, clearly they are going to have difficulty doing that,” said Tim Smith, professional support lawyer at Herbert Smith Freehills.

Smith also pointed to an unusual paragraph in the judgment referring to the possibility that losses of less than 50 per cent might still be considered “manifestly disproportionate”, and said: “That to me hints that in some circumstances even 50 per cent might not be enough.”