In Hughes and others v the Board of the Pension Protection Fund  EWHC 1598 (Admin), the High Court has held that the imposition of the PPF compensation cap (applied to members that fall below their scheme’s normal pension age (NPA) on the date a PPF assessment period begins) constitutes unlawful discrimination on grounds of age, meaning the cap should be disapplied.
The Court also held that the Pension Protection Fund’s (PPF’s) proposed methodology for implementing the Court of Justice of the European Union’s (CJEU’s) decision in Hampshire v Board of the Pension Protection Fund were inadequate. In Hampshire, the CJEU held that Article 8 of the Insolvency Directive (2008/94/EC) required Member States to introduce measures which ensured that employees received at least 50% of their occupational pension rights if their employer becomes insolvent.
This decision raises a number of questions and has potentially significant implications for the PPF and for schemes that are in, have previously been in or that enter a PPF assessment period.
When a scheme is transferred into the PPF, the PPF is obliged to pay compensation to the scheme’s members equal to:
- 100% of the pension payable to members who have attained their scheme’s “normal pension age” (NPA) as at the assessment date and to members who are below their scheme’s NPA on that date but who have retired early on grounds of ill-health, and
- 90% of the pension payable to members who are below their scheme’s NPA as at the assessment date.
The compensation payable to members who are below NPA (and who are not in receipt of an ill-health pension) is also subject to a compensation cap. The cap is increased annually. From 1 April 2020, the cap is equal to £41,461 at age 65 for a member who has 20 years or less pensionable service in their scheme. When the 90% compensation percentage is applied to the cap it means that the maximum amount that a member with 20 years or less pensionable service could expect to receive from the PPF is £37,314 per year (being 90% of £41,461).
In 2017, amendments were made to the relevant legislation which mean that the compensation cap is increased for individuals with more than 20 years pensionable service by 3% for each full year of pensionable service over 20 in their scheme.
In 2018, the Court of Justice of the European Union (CJEU) ruled in Hampshire v Board of the Pension Protection Fund that Article 8 of the Insolvency Directive requires member states to implement measures to ensure that employees receive at least 50% of the value of any pensions they have accrued under occupational pension schemes if their employer becomes insolvent. In the UK, this meant that the PPF was required to ensure that this minimum threshold was met in respect of every member who receives PPF compensation. However, the CJEU did not specify precisely how this should be done.
Therefore, in an attempt to comply with the judgement in Hampshire, the PPF decided that it would calculate the actuarial value of the compensation payable to a member from the PPF and compare this with the actuarial value of the pension to which the member would have been entitled to under their scheme. If the actuarial value of the compensation due from the PPF was found to be less than 50% of the actuarial value of the pension to which a member would have been entitled, the PPF would pay an additional amount of compensation to that member to make up the difference, referred to as an “uplift”. However, if the actuarial value of the PPF compensation was equal to or greater than 50% no uplift would be payable.
Mr Hughes and 23 other members of the PPF, together with the pilots union, BALPA, challenged the way in which the PPF proposed to implement the CJEU’s judgment in Hampshire on the basis that, under the PPF’s methodology, it was still possible for a member to receive compensation which was less than 50% of the amount of the pension that they would have received from their former pension scheme. This is because the PPF’s methodology involves a one-off comparison which is carried out using actuarial assumptions. To the extent that the assumptions used turn out to be incorrect, for example, because a member lives longer than expected or future inflation is higher than expected, the amount of compensation that the member actually receives from the PPF may still turn out to be less than 50% of the pension to which they would otherwise have been entitled under their former scheme.
As well as challenging the PPF’s proposed methodology, the claimants also challenged the lawfulness of the PPF compensation cap by way of judicial review.
Mr Hughes was a member of the HLG Scheme and he was under the scheme’s NPA at the start of the scheme’s assessment period. His pension was £66,245 on that date but as a result of the compensation cap he was only entitled to PPF compensation equal to around £17,000.
Mr Hampshire was a member of the T&N Scheme and he was also under the scheme’s NPA when it transferred into the PPF. His annual pension at the start of the assessment period was £60,234, but as a result of the compensation cap his PPF compensation was limited to £22,012 and he only received 90% of this.
Some of the claimants were pilots and members of the BMI or Monarch Schemes who also experienced significant reductions in their pension benefits when their scheme entered the PPF. For example, Captain Parson’s pension under the BMI Scheme would have been £79,069 however he was only entitled to £24,881 from the PPF. In addition, a survivor under the BMI Scheme would have been entitled to 2/3rds of the deceased member’s pension and some survivors claimed they received less than 50% of this by way of PPF compensation.
The High Court was asked to consider five questions:
- Did the compensation cap gives rise to unlawful discrimination on the grounds of age contrary to EU law or the Convention?
The Court held that the imposition of the compensation cap constituted unlawful discrimination on grounds of age contrary to EU law. When enacting the provisions imposing the compensation cap, the UK was implementing EU law and therefore, implementing the obligation under Article 8 of the Directive to take the necessary measures to protect occupational pension rights. Although the compensation cap only affected a small number of employees, it had serious financial consequences and therefore a proper justification was needed.
The defendants put forward six justifications. The principal two being:
- combating moral hazard, and
- to ensure that the costs of the scheme for pension protection would not be such as to deter employers from continuing to provide defined benefit occupational pension schemes.
Whilst Mr Justice Lewis accepted that these were legitimate aims he held that the imposition of the compensation cap in its original form (and even following the changes introduced in 2017) was not an appropriate and necessary means of achieving those aims. In particular, he struggled to see how imposing the compensation cap on a small number of employees would reasonably help in combating moral hazard and how it would comtribute to the aim of not detering employers from providing occupational pensions, given the limited cost savings associated with this.
The challenge to the compensation cap was brought by way of judicial review. All of the claimants were out of time on the basis that their claims arose more than 3 months before the challenge was made (with 3 months being the period within which challenges by way of judicial review typically need to be made). However, the judge exercised his discretion to allow the challenge to be brought on the basis that the claimants would be able to bring private law proceedings to challenge the imposition of the compensation cap on the same grounds in any event and because the proceedings raised issues of general importance which were likely to arise in future cases.
- Does the approach adopted by the PPF to ensure that a person receives 50% of the value of their accrued pension entitlement comply with Article 8 as interpretted by the CJEU in Hampshire?
The Court held that the guarantee provided for by Article 8 of the Directive is owed to each and every individual employee. It is not sufficient that most of the employees will receive payments of the amount envisaged by the Directive. Furthermore, the CJEU has made clear that Article 8 is designed to provide a minimum level of protection for employees and that this should relate to the entire period of an individual’s pension entitlement. This means that the level of protection must take account of the level of benefits to which an individual was entitled at the time of the insolvency and any increases in those benefits that would have been payable over time.
The Court considered the relevant CJEU case law but found it stopped short of prescribing the method that should be used to achieve this.
Furthermore, the Court held that the PPF is entitled to adopt a method which involves a one-off calculation and that it is not required to carry out a year-on-year comparison. However, it is required to ensure that the cumulative level of compensation paid to each individual does not fall below 50% of the value of the benefits that would have been paid to that individual under their former scheme. If the method adopted results in any individuals receiving less than 50% of the pension that they would otherwise have received, the PPF will need to have a way of identifying and remedying that shortfall.
Separately, the Court held that the PPF’s approach to calculating survivor’s benefits was wrong, as a matter of principle, as the compensation payable to a survivor was calculated as being 50% of the PPF compensation payable to the member at the date of the member’s death (taking account of any adjustment made as a result of Hampshire) when, following Hampshire, it should be equal to at least 50% of pension that the survivor would have received under the relevant scheme.
- Do any time limits apply to claims against the PPF for arrears of compensation?
This question only related to claims for arrears made against the PPF in respect of the HLG Scheme. The Court held that the claim was subject to the six-year limitation period provided for by section 9 of the Limitation Act 1980. The Court distinguished this from the decision in Lloyds Bank by drawing a distinction between the present claim, which was a claim to enforce a statutory right to compensation against a statutory corporation, and a claim by a beneficiary of a trust to recover trust property from trustees, as in Lloyds, where it was held that no statutory limitation period applies.
- What interest would be payable on arrears?
The Court did not answer this question as it decided that it would be better for this issue to be dealt with in the context of specific claims and not in the abstract.
- During a PPF assessment period, are trustees of the relevant scheme restricted to paying an amount of benefits which is no more than the compensation that the Board will have to pay if the pension scheme does eventually transfer to the Fund?
This question also concerned only one scheme – the T&N Scheme. However, the decision is likely to affect many other schemes that are in or that enter a PPF assessment period. It may also impact members whose scheme has transferred into the PPF or whose benefits have been secured with an insurer following an assessment period.
In short, the judge held that the trustees of a pension scheme must ensure that the benefits paid under the pension scheme during an assessment period are reduced to the extent necessary so that they do not exceed the compensation that would be payable by the PPF and any sums it must pay by reason of directly effective rights conferred by Article 8 of the Directive. The difficulty with this is how are trustees supposed to know how much is payable in this interim period while the PPF works out its approach and to what extent will they need to go back and put things right where members have been underpaid as a result of this uncertainy.
Although this decision is likely to affect less than 1% of PPF members it is likely to cause a number of headaches for the PPF (subject to any appeal that may be brought). In particular, the PPF:
- will need to revisit and modify its methodology for implementing the Hampshire judgment and to work out how it will ensure that, moving forwards, members and survivors receive at least 50% of the pension that they would have received from their occupational pension scheme, and
- will need to disapply the compensation cap for the future and determine the extent to which it is required to make good past underpayments as a result of applying the cap up to this point.
The fact that trustees of scheme’s in assessment are required to make payments to members during the assessment period which reflect the compensation payable by the PPF taking account of the decisions in this case (as well as those in Hampshire and Bauer) also gives rise to a number of questions. For example:
- for schemes that are currently in an assessment period or enter one in the near future, how are the trustees supposed to know what level of benefits should be paid to members affected by this judgment (and the judgments in Hampshire and Bauer) until the PPF makes clear its revised approach?
- will trustees whose schemes are already in an assessment period be required to make top-up payments where members have been underpaid in breach of Article 8 or as a result of the imposition of the compensation cap?
- what should happen where members have been underpaid during an assessment period in the past and their scheme has subsequently transferred into the PPF or their benefits have been secured with an insurer? Who is responsible for making good those past underpayments, to the extent that there is an obligation to do so?
Update 19 Aug 2020: The PPF has confirmed that it plans to appeal the aspects of this decision regarding how the Hampshire judgment should be applied in relation to the benefits payable to PPF members and survivors. The DWP also plans to appeal the decision regarding the unlawfulness of the PPF compensation cap.