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UK Pensions Speedbrief: PPF compensation cap unlawful

  • United Kingdom
  • Pensions

07-09-2018

Hampshire v PPF

The Court of Justice of the European Union (CJEU) has in the case of Hampshire v PPF accepted the opinion of the Advocate General and ruled that PPF compensation limits are unlawful insofar as they result in affected members receiving less than 50% of their original pension entitlement.

Facts

The case was brought by Mr Hampshire who had been a member of the Turner & Newall pension scheme from 1971 to 1998 when he took early retirement. His scheme went into a PPF assessment period in 2006 when he was still below the scheme’s Normal Retirement Age (NRA).

The PPF imposes a cap on compensation in such circumstances and the effect of this was that Mr Hampshire’s pension was reduced by some 67% - from £60,240 to £19,819. The impact on his benefits would have increased over time as the PPF does not provide increases on pre April 1997 benefits (which is when most of his service had been earned). Had Mr Hampshire been over NRA no reduction would have been applied.

Mr Hampshire challenged the PPF and the lawfulness of the reduction in his benefits on the basis of Article 8 of the European Directive on protecting the rights of employees in the event of their employer’s insolvency. This requires Member States to “protect” pension rights following corporate insolvency and previous CJEU decisions have held that the minimum level of protection required was 50%. The UK argued that there was no requirement for individual members to receive 50% of their benefits and the test was satisfied if on average members received 50% of their benefits.

Decision of the Court of Justice of the European Union

The CJEU upheld Mr Hampshire’s complaint in robust terms and said that “every individual employee must receive old-age benefits corresponding to at least 50% of the value of his accrued entitlement under a supplementary occupational pension scheme in the event of his employer’s insolvency”. The protection test was not satisfied by looking at what members received on average. This means that the existing PPF caps on compensation will not be lawful for some members.

In addition, the CJEU went on to say that PPF compensation should never fall below 50% of the member’s accrued entitlement, meaning that promised pension increases (including those relating to pre-1997 service) need to be taken into account in calculating the amount of PPF compensation payable.

Wider implications

This is a significant decision and there will be a number of wider implications for the PPF, trustees and members.

The decision in relation to pension increases will cause administrative difficulties for the PPF as it will presumably be necessary to run the 50% test on an annual basis where the PPF compensation level is eroded by inflation. The PPF only pays CPI increases up to 2.5% and only on post April 1997 benefits. This means that a member with an entitlement to higher increases, for example 5% increases on pre 1997 benefits, could easily fall below the 50% threshold several years after reaching NRA.

However, given the potentially small numbers of members affected, the case is unlikely to have any material impact on the levy for schemes outside the PPF.

There may be complications for schemes that are going through a PPF assessment period now and those that have in the past not gone into the PPF because they were thought to be able to provide benefits in excess of PPF levels. In addition, schemes that have offered ”PPF plus” benefits on a restructuring may need to consider the implications of the decision for them.

Trustees winding up a scheme outside of the PPF may also need to look at the implications of this case as legislation reflects the PPF’s current approach but this is now at odds with the CJEU position. The legislation is not only relevant for PPF entry but also determines the priority of asset allocation.

Comment

This judgment, while significant, is perhaps not surprising given earlier CJEU decisions that requirements on member states to offer “protection” of benefits should be interpreted to mean a minimum 50% level.

There has always been an obvious and material difference in protection offered in the UK between those who have reached their NRA and those that have not and the case also highlights that there can be a material impact on a member where there is no protection in place for increases before 1997. Nevertheless, the full implications of this judgment in practice – for the PPF, trustees and those who have in the past or may in the future provide PPF plus style benefits may take time to fully work through.

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