In a landmark decision, the CJEU has ruled that it is unlawful for PPF compensation to be less than 50% of the benefits an individual has built up before their employer became insolvent.

The PPF is reviewing how it calculates member benefits as a result of this decision. Although the decision is only expected to affect 1% of its members directly, it will also need to be considered by:

  • the DWP in relation to FAS top-up benefits; and
  • trustees of schemes who have wound up their scheme outside of the PPF, or who have completed (or are considering) a PPF-plus buy out of their scheme benefits.

Background: PPF compensation

The Pension Protection Fund (PPF) was established to meet the UK’s obligation under Article 8 of the EU Insolvency Directive. Article 8 provides that Member States are obliged to take the necessary measures to protect the interests of employees and former employees at the date of their employer’s insolvency, in respect of rights under an occupational pension scheme which were built up prior to the insolvency.

Grenville Hampshire v The Board of the Pension Protection Fund

As we have previously reported, this case concerns a member, Mr Hampshire, whose pension had been reduced by 67% due to the application of the PPF compensation cap, following the insolvency of his employer.

The Court of Appeal referred two questions to the Court of Justice of the European Union (CJEU):

1. whether Article 8 had direct effect (in other words, whether an individual could rely on Article 8 in bringing a claim against the PPF); and

2. if so, whether Article 8 should be interpreted to require the PPF to provide each individual employee with compensation of at least 50% of the value of their benefits built up in their occupational pension scheme prior to their employer’s insolvency.

On 26 April 2018, the Advocate General for this case published her opinion. In her view, the answer to both of the above questions was “yes”. As such, in her opinion, the current position of guaranteeing all employees in an eligible occupational pension scheme compensation of at least 50% of the value of their benefits on average would not meet the minimum standard required by Article 8.

Additionally, and of greater impact, the Advocate General considered that Article 8 also protected future growth on an employee’s pension entitlement. As such, the guaranteed amount should not fall below 50% of the protected benefit, including increases, over the period the compensation is in payment.

On 6 September 2018, the CJEU confirmed the Advocate General’s opinion, ruling that Article 8 had direct effect as against the PPF, and requiring the PPF to guarantee providing each individual member with PPF compensation of at least 50% of the value of their benefits built up in their occupational pension scheme prior to their employer’s insolvency. This minimum level of compensation must last throughout the period the compensation was payable, to prevent the amount guaranteed falling, as a result of the passage of time, below 50% of the initial value of the benefits for one pension year.

What will happen next?

Following the CJEU ruling, this matter must now be remitted back to the Court of Appeal in accordance with CJEU procedures. The adoption of the CJEU’s ruling is expected to be a formality, although the Court of Appeal may need to consider how retrospective PPF compensation should be dealt with.

Additionally, as PPF compensation is set out in legislation, the UK government will be required to amend legislation in order to implement the CJEU’s ruling.

Key points to take away

1. Whilst this is a significant decision, the CJEU’s ruling was not unexpected, given the Advocate General’s opinion.

We understand that the PPF and DWP have already been considering various options based on the Advocate General’s opinion. Both the DWP and PPF have publically confirmed that they are committed to implementing the judgment as quickly as possible, once the UK Court of Appeal proceeding has been concluded. However, given the timing of this decision in relation to Brexit negotiations, it may take longer for legislation to be drafted and enacted to provide the PPF with the framework to pay the required level of compensation envisaged by the CJEU’s ruling.

2. Whilst the CJEU’s ruling is clearly good news for high earners who have seen their benefits cut significantly as a consequence of their employer’s insolvency, it does not just affect members subject to the compensation cap. It will also have an impact on how the PPF deals with increases to pensions in payment and survivor benefits. However, the PPF currently estimates that the ruling will only affect around 1% of its members.

In order to provide reassurance to individual members, the PPF has confirmed that, once the DWP and PPF have agreed how to implement the CJEU ruling, it will directly contact those members it identifies as being affected by the ruling to explain how it will implement any changes to their compensation. However, it is worth reiterating that the vast majority of members will not be affected by this ruling.

3. The top-up benefits provided through the Financial Assistance Scheme (FAS) will also need to be reviewed. As FAS is funded by the DWP, it is for the DWP to decide how to implement the CJEU ruling in relation to FAS members. However, as the PPF acts as the administrator for FAS, the PPF will implement the DWP’s decision once it is made. As such, the reassurance from the PPF set out above applies equally to FAS members.

4. Given that the CJEU ruling is not expected to affect the vast majority of PPF members, it appears to us unlikely that the PPF levy charged to eligible pension schemes will be increased to meet the additional liability arising as a result of this ruling.

5. It is not just schemes that have transferred into the PPF which need to be aware of the CJEU ruling. Depending on the Court of Appeal decision and any resulting legislation, this ruling may need to be considered by schemes which have wound up outside of the PPF and those schemes which are currently looking to buy out PPF-plus benefits. This is because the statutory priority order set out in section 73 Pensions Act 1995 requires trustees to mirror PPF benefits.