A Brexit hangover and what it means for PPF compensation

We examine what impact the Court of Justice of the European Union decisions in Hampshire v PPF and PSV v Bauer will have on PPF compensation post-Brexit

20 December 2021

In 2018 and 2019 the Court of Justice of the European Union (CJEU) heard two cases which have potential implications for the compensation provided by the Pensions Protection Fund (PPF). The first was Grenville Hampshire v the Board of the Pensions Protection Fund, the final decision in relation to which was handed down by the Court of Appeal on 19 July 2021. The second was the German case of PSV v Bauer. The DWP is reportedly looking to overturn the second of these decisions and has invited stakeholders to a virtual roundtable on 10 December to discuss introducing primary legislation to do so. We recap what the CJEU decided in those cases and what changes will be made to the calculation of the compensation provided by the PPF and PPF valuations as a result.

Who should read this update?

This update is of relevance to all those involved in occupational defined benefit schemes that are eligible for PPF entry including sponsoring employers, trustees and advisers to such schemes. Scheme actuaries will need to take account of the updated valuation guidance issued by the PPF on 30 November following the two judgments.  The update will be of particular interest to trustees of schemes who are working towards a PPF+ buy-in as it may have an impact on the level of benefits that should be secured for individual members under any bulk annuity policy.

PPF compensation

To recap, the PPF lifeboat for distressed schemes provides compensation for members whose sponsoring employers have gone into insolvency where the assets of the pension scheme the employer sponsors are insufficient to meet a certain protected level of liabilities.

Compensation is paid at a rate of either 100 per cent or 90 per cent of full scheme benefits. Broadly, pensioners who are over the scheme’s normal pension age or who had taken ill-health early retirement at the date the scheme went into PPF assessment receive compensation at a rate of 100 per cent of the annual rate of the pension under the admissible rules of the scheme. Other pensioners, as well as active and deferred members, receive compensation at a rate of 90 per cent of their accrued pension. This 90 per cent figure is also subject to a monetary cap (set at £41,461 for 2021/22, giving an annual figure of £37,315 once the cap is applied).

How did the CJEU get involved?

Article 8 of Directive 2008/94/EC (protection of employees' pension rights in the event of the insolvency of their employer) (the EU Insolvency Directive) provides that member states are obliged to take 'necessary measures' to protect the interests of employees and former employees at the date of their employer's insolvency in respect of accrued rights to old-age benefits under occupational pension schemes.

In 2018 the CJEU considered what the term 'necessary measures' meant in the case of Hampshire v the Board of the Pension Protection Fund and specifically what level of pension benefits must be provided under the EU Insolvency Directive. It held that the EU Insolvency Directive requires member states to guarantee that each individual employee receives compensation corresponding to at least 50 per cent of their accrued old age pension if the employer responsible for funding the scheme they have paid into fails.

The question of the meaning of Article 8 was considered again by the CJEU in 2019 in the German case of Pensions-Sicherungs-Verein WaG v Günther Bauer. In this case, the CJEU upheld its ruling in Hampshire v PPF but went on to find that even where an employee receives at least half of the amount of benefits arising from his acquired pension rights, a reduction in benefits will be manifestly disproportionate where the employee is already living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the member state concerned. This left the PPF having to undertake a two part check: first, to assess whether members’ compensation has fallen below 50 per cent of the total benefits provided by the scheme and secondly, whether, any reduction in benefits would leave the member having to live below the relevant poverty threshold.

What was the subsequent immediate reaction of the PPF and the Government?

Following the Hampshire decision, pending amending legislation, the PPF adopted an approach under which it conducted a one-off actuarial valuation of pension benefits payable to the member under their original scheme and compared that with the amount of compensation the PPF would pay the member over time, applying an uplift to the compensation where required.

Following the Bauer decision, the PPF issued a press release stating that it believed that its implementation methodology met the requirements of the judgment but it was working through certain aspects of the judgment with the Department of Work and Pensions.

Further litigation in Hampshire

In May 2020, the claimants brought a challenge against the PPF in the High Court on two separate aspects of the compensation calculation:

1. Is the method by which the PPF implements the Hampshire ruling and tests whether the '50 per cent of accrued entitlement' threshold has been met fit for purpose? (the '50 per cent issue')

2. Does the application of the compensation cap to some members constitute unlawful discrimination on the grounds of age? (the 'age discrimination issue')

The High Court found in favour of the claimants on both points and the PPF lodged an appeal to the Court of Appeal. On 19 July 2021 the Court of Appeal handed down judgment. On the 50 per cent issue, the High Court decision was overturned and the Court of Appeal found in the PPF’s favour - the PPF’s value test approach for calculating compensation on a one off basis to PPF (and FAS) members was sufficient, as long as this corresponds to at least 50 per cent of a member’s pre-insolvency entitlement.

However, on the age discrimination issue, the Court of Appeal confirmed the High Court’s decision that the PPF compensation cap constitutes unlawful age discrimination and must be disapplied. Applying the cap only to the benefits of pensioners who have not yet reached normal pension age, who are by definition likely to be younger, was discrimination and the Appeal court judges held there was no objective justification for its use; it was not a proportionate means of achieving a legitimate aim. In view of the significance of the issue, the Court of Appeal gave leave to appeal the ruling on the compensation cap to the Supreme Court.

What does all of this mean now for PPF compensation?

With regard to Hampshire, the Secretary of State for Work and Pensions has confirmed that the Government will not appeal the ruling on the cap. The respondents have confirmed that they will not appeal further on the approach to calculating the Hampshire 50 per cent minimum. The PPF has started work to implement the judgment. According to the judgment the removal of the cap will benefit around 550 current PPF members and survivors and will add around 1 per cent to the PPF’s liabilities.

However, the Government has reportedly taken a different line with regard to implementing the Bauer decision. Interested stakeholders have been invited to a virtual roundtable on 10 December, at which it is keen to look at introducing primary legislation to remove the Bauer ruling from UK law as soon as parliamentary time allows. This is hardly surprising given that the UK would have to collect household income data to set an at-risk-of-poverty threshold equivalent to that used by Eurostat. Introducing post-Brexit primary legislation will remove a potentially significant administrative burden for the PPF who, otherwise, would have to obtain income information from each member and keep that information updated to continuously monitor whether their income fell below the set poverty line.

With regard to implementing the Hampshire decision, the PPF issued an update on 2 December. It has now paid arrears due to FAS pensioners and no longer applies the cap to new retirees. However, it is a complex task to correct the position for capped pensioners and the PPF expects it will take until the end of next year before the process is complete. It has also recently confirmed that a six year time limit will not be applied to arrears. 

Scheme actuaries should note that the PPF issued updated valuation guidance on 30 November which confirms that, since the cap has been disapplied, it should not be used when calculating compensation in s143, s152, s156 or s158 valuations (which are relevant in determining the level of scheme funding when a scheme transfers to the PPF following an employer insolvency). However, the PPF has confirmed its interim view that no allowance needs to be made for the impact of the Hampshire or Bauer judgments when preparing s179 valuations (which are used to determine a scheme’s PPF levy). 

 

Takeaways for Trustees

  • Trustees of any schemes who are working towards a PPF+ buy-in should seek advice as to whether and how the Hampshire ruling may affect the level of benefits payable to individual members.
  • Trustees should ensure that any references in member communications to the levels of compensation provided by the PPF takes account of the Hampshire ruling.

This article was written by Louise Pettit and Catrin Young.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions
  • Pensions Services
  • Pensions Legal Advice

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