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PPF compensation cap ruled unlawful by recent court case

  • Legal Development 21 July 2020 21 July 2020
  • UK & Europe

  • Employment, Pensions & Immigration

Hughes v the Board of the Pension Protection Fund

The High Court has ruled that the compensation cap applied by the Pensions Protection Fund (PPF) to members of schemes in the PPF who are below "normal pension age" at the start of the PPF assessment period was unlawful age discrimination contrary to EU law.  The judicial review of the compensation cap therefore found that it was unlawful and should not be applied to the relevant members' PPF compensation.  The disapplication of the cap will affect just 0.5% of those receiving compensation from the PPF but for those people, will be a very significant benefit.  It could also have other implications for the PPF which we discuss below.

As background, this case concerns the compensation payable by the PPF to members of defined benefit pension schemes whose employer has become insolvent.  The case is preceded by the case of Hampshire v Board of the PPF in which the European Court ruled that Member States must make sure that employees receive benefits equivalent to at least 50% of the value of their accrued pension entitlement.   Under UK law, as soon as a scheme employer becomes insolvent an assessment period begins for their defined benefit scheme.  During that period, the trustees are restricted in what they can pay to members.  If, on assessment, the assets of the scheme are not sufficient to provide a certain level of benefits to its members,  the assets are transferred to the PPF which assumes responsibility for paying compensation to members and survivors.

PPF compensation is limited as follows:  Members of a scheme in PPF assessment who have reached "normal pension age" by the date of assessment or who have retired early for ill-health, receive PPF compensation of 100% of their scheme benefits.  Those who have not reached "normal pension age" are paid PPF compensation of 90% of their scheme benefits but subject to a cap (£41,461 at age 65 for 2020/21). The PPF is funded largely by a levies on defined benefit pension schemes.

In this case, Mr Hughes was a member of a scheme which had been transferred to the PPF and due to the PPF’s cap, he was receiving some 23% of his scheme benefits.

The court ruled that there was direct age discrimination because the cap only applies to those who have not reached a certain age at the assessment date and so the PPF tried to argue the cap was objectively justified as a proportionate means of achieving two legitimate aims:

  • to combat “moral hazard” by creating a clear incentive for company decision-makers to ensure that schemes were properly funded.  If the PPF provided full protection for everyone, the decision makers would be less concerned with funding the scheme knowing that the PPF would provide full benefits in every case
  • to ensure that the costs of the PPF (through the levy) were not so high as to deter employers from continuing to provide occupational pension schemes

The court found that the aims of combating moral hazard and costs were legitimate but the judge thought that the compensation cap was not an appropriate and necessary means of achieving those aims. The cap applied to a small proportion of persons whose scheme transferred to the PFF who would suffer very serious financial losses and so was not a proportionate means of achieving those aims. 

Any arrears now applying for those members previously subject to the compensation cap should be subject to a 6 year limitation period under the Limitation Act 1980.

The court also found that the PPF was entitled to devise its own method for providing compensation that was equal to 50% of the actuarial value of their benefits under the scheme (after the Hampshire case).

The PPF have said they are "studying the detail of the judgment carefully to decide our next steps and we will work closely with the Department for Work and Pensions (DWP) to understand how the UK government will respond.  While we do so, we'll continue to pay our members their current level of benefits."

Clyde & Co comment

The decision will not be welcomed by the PPF coming as it does hot on the heels of the Hampshire case and also the Bauer case (members' benefits should not be reduced below the "poverty threshold").  It is true that only a very small percentage of members in the PPF are affected by the cap so the decision may not have very significant implications for the PPF funding.  However, it is likely to have implications for how PPF deals with the Hampshire case and it remains to be seen whether this case will lead to a future legal challenge to the 90% of scheme benefits currently payable to those under "normal pension age" at the assessment date.  The case will also cause issues for schemes currently winding up outside the PPF who must provide benefits at least as good as PPF compensation levels.




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