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PPF compensation cap is age discriminatory

  • United Kingdom
  • Pensions


In the case of Hughes v PPF, scheme members affected by the PPF compensation cap have this week won a significant victory in the High Court, obtaining a ruling that the cap amounts to unlawful discrimination on grounds of age and must be disapplied.

Although the number of members affected represents only a tiny percentage of those currently receiving or entitled to PPF compensation, the decision is likely to cause a practical headache for the PPF, coming as it does on top of the earlier CJEU decision in Hampshire v PPF that scheme members must receive PPF compensation equal to at least 50% of the value of their accrued pension entitlement. Observations made in the Hughes judgment about the PPF’s response to the Hampshire ruling may well mean that the PPF has to refine its proposed approach.


From the inception of the PPF, the compensation provisions have always incorporated a cliff-edge distinction between those members who are under their scheme’s “normal pension age” (NPA) at the date of the employer’s insolvency (the assessment date), and older members.

For those at or over NPA at that date, the PPF pays (broadly) 100% of their scheme entitlement. With the exception of those who retired on the grounds of ill-health, the benefits for those under NPA are cut back in two ways:

  • for all members, there is an automatic reduction to 90% of benefits
  • secondly – and this was the focus of the challenge in Hughes – there is an absolute financial cap, applied before the 10% reduction. The cap was originally set so that the 90% level of benefit in 2005 was £25,000; with indexation, this had become a little over £36,018 by 2019/20. Alterations were also made to the compensation cap in 2017 to provide a higher cap for members with long service (over 20 years).

In addition, all members, regardless of age at the assessment date, will see changes to the calculation of indexation and survivors’ benefits.

The judgment in Hughes gives some stark illustrations of the adverse impact of the current PPF restrictions for those under NPA. For instance, 11 years on from his employer’s insolvency, Mr Hampshire was receiving benefits which were less than 30% of his accrued entitlement. Mr Hughes, whose pension scheme provided for non-statutory fixed 5% pension increases on much of his accrual, was receiving less than 20% of his entitlement.

The Hampshire case

Hughes is not the first legal challenge to the operation of the PPF compensation cap. In the case of Hampshire v PPF in September 2018, the CJEU ruled that the operation of these rules for members under NPA did not comply with the EU requirements for minimum levels of protection for employee pensions in the event of employer insolvency. According to the Court, EU law requires that each member must receive a minimum of 50% of the value of their accrued pension entitlement, and whether this threshold is met must be assessed taking account of future pension increases over the whole of the member’s retirement.

Following the Hampshire decision, in November 2018 the PPF announced its intention to comply with the CJEU’s ruling by carrying out a one-off assessment of the actuarial value of a member’s accrued entitlement, based on assumptions as to the duration of the member’s retirement and future changes to inflation. If this assessment revealed that the actuarial value of the standard PPF compensation which the member would otherwise receive would be below 50% of the actuarial value of their entitlement under the scheme rules, the starting level of PPF compensation would be uplifted until the 50% test was met. There would be no future adjustment in the light of subsequent events, and arrears of compensation for those already receiving benefits would be subject to any applicable limitation period under the Limitation Act 1980.

The decision in Hughes – age discrimination

The most ground-breaking part of the Hughes claim was that the compensation cap amounted to unlawful direct age discrimination, given that it applies only to those who have not reached a specified age at the assessment date.

Sensibly, the PPF did not attempt to argue that there was no discrimination, but sought instead to demonstrate that there was objective justification. The argument put forward was that the cap provisions were a proportionate means of achieving two legitimate aims:

  • to combat “moral hazard” by creating a clear incentive for senior decision-makers within the employer’s management team to ensure that schemes were properly funded, rather than just relying on the existence of the PPF. The incentive was both direct (because decision-makers’ own benefits were likely to be adversely affected in the event of employer insolvency), and indirect (because the negative impact on other current and former employees would further influence senior managers)
  • 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

Lewis J accepted that both aims were legitimate, and also indicated that the 90% limit on benefits for those below NPA (which was not actually challenged in this case) would potentially be appropriate and necessary. However, the compensation cap was disproportionate, and therefore unjustifiable: it affected only a very small group of members, but had a very significant adverse effect on those members. Against that background, it was difficult to see that the cap added anything material to the effects of the 90% limit in achieving the identified aims.

Since the cap was unlawful, it must be disapplied.

The decision in Hughes – implementing Hampshire

The claimants in Hughes also challenged the PPF’s proposed response to the Hampshire decision. They argued that a one-off assessment and adjustment carries the risk that, if the actuary’s assumptions are not borne out in practice – for instance, if the member lives longer than expected – the PPF compensation received will not meet the 50% minimum threshold.

On this point, Lewis J effectively took a middle line between the opposing positions. In his view, the Hampshire decision does not require the PPF to carry out a year-on-year assessment of whether the compensation payable in each year meets the 50% test. The assessment can be carried out on an aggregate basis, taking account of the overall value of benefits over time (as the PPF is proposing). However, what must be provided is 50% of the actual value, not 50% of the actuarially predicted value: if the PPF’s proposed system leaves open the risk that any individual member may ultimately receive less, the system “will need to have a way of identifying and dealing with that eventuality”.

In addition, a specific point was raised as regards the calculation of survivors’ benefits, where the PPF compensation payable is 50% of the member’s pension at the date of death. The claimants pointed out that this calculation basis may not provide 50% of what the scheme would have paid to a survivor – for instance, if the scheme rules provide for a pension of two-thirds of the member’s pension before any commutation for a lump sum.

Here, the judge agreed with the claimants. Although EU law is concerned with protecting the rights of employees, it recognises specifically that those rights include survivors’ benefits. Therefore, payment of less than 50% of the value of the benefits which the scheme would have paid to survivors is not sufficient.

The decision in Hughes – other issues

Since Lewis J (and the CJEU before him) held that elements of the basic design of the PPF compensation provisions had been unlawful from the very start of the PPF in 2005, an obvious question is whether full arrears of compensation must be paid to affected members, or whether claims may be time-barred under the Limitation Act 1980.

In contrast to the position applying to pension schemes outside the PPF (where the starting-point is that there is no limitation period, though forfeiture provisions may bar claims for arrears), Lewis J held that a six-year limitation period applies to claims for PPF compensation, since they are claims under a statutory provision. In practice, this means that the PPF is not obliged to pay arrears in respect of any period earlier than 6 September 2012, being six years before the Hampshire CJEU decision.

A final question raised was whether trustees of schemes still undergoing PPF assessment were required to cap benefits at the level of PPF compensation as set out in the provisions of the Pensions Act 2004, despite those provisions having been held unlawful. On this point, the judge was clear that the obligation on the trustees is to pay the level of benefits which the PPF would have had to pay if the scheme had completed assessment, taking account of the decisions in Hampshire and in Hughes itself. Given that several schemes (including Mr Hampshire’s) have now been in assessment for well over a decade, and bearing in mind the fact that no limitation period applies to payments from trust schemes, it is therefore possible that some substantial arrears payments will now be due.


To place this decision in context, it is worth noting that only about 0.5% of pensioners currently in the PPF are actually affected by the compensation cap. For those members, as well as their counterparts in schemes in assessment or who are anxiously eyeing the financial fortunes of their scheme’s employer, the declaration that the cap is unlawful will be significant; but it should not create huge disruption for the PPF or for schemes in general.

It is also relevant that the PPF’s chief actuary did not appear to believe that the presence or absence of the cap would affect the amount of the levy required to be collected. Nevertheless, schemes with a higher than usual number of members subject to the cap could see an impact on their PPF funding position, and possibly therefore on their individual levy. This may be relevant to (for example) executive arrangements, or schemes in certain industry sectors where earnings are typically higher than normal, such as aviation.

As regards the other aspects of the judgment, the vast majority of cases caught by the CJEU decision in Hampshire are ones where the cap is the root cause of PPF compensation falling below the 50% threshold. Consequently, the ruling that the cap must be disapplied means that, in practice, the judge’s findings regarding the PPF’s implementation of Hampshire will now have less significance than would otherwise have been the case. However, the decision that the 50% test applies separately to survivors’ benefits is potentially material.