The eagerly awaited High Court judgment, involving four people who lost all or part of their company pension when their employer collapsed, arrived recently. In this article, we assess the implications of this ruling to the pensions industry.
The High Court case was brought by four pension scheme members who lost all or part of their pension when the engineering company, Allied Steel & Wire Limited, went into liquidation in April 2003.
The scheme members initially issued a complaint to the Parliamentary Ombudsman, Ann Abrahams. She published a report in March 2006, which found that the Department of Work and Pensions (and its predecessor, the Department for Social Security) had been guilty of maladministration. She declared that this maladministration (amongst other factors) had caused injustice to over 75,000 people who had lost some or all of their fi nal salary pension. In particular, the report found that the Government had provided misleading information to occupational pension scheme members about the security of their pension benefi ts, by failing to emphasise that the security of deferred and active members’ benefi ts depended upon the fi nancial security of their employer. Offi cial leafl ets were described as ‘inaccurate, incomplete, unclear and inconsistent.’ The Ombudsman recommended that the Government should consider making arrangements to provide ‘core pension and non-core benefi ts’ for these individuals. However, in an unusual move, the Government refused to accept the report, and rejected all but one of the Ombudsman’s fi ndings and recommendations. Members of the collapsed companies then applied for judicial review of the Government’s refusal to accept the Ombudsman’s fi ndings and recommendations. The High Court initially referred the case to the European Court of Justice (the ECJ), which held that although the UK Government was in breach of a 1980’s Insolvency Directive, which was designed to safeguard pension scheme members’ benefi ts, it was not necessarily required to fund the lost pension rights.
The long running litigation culminated with Mr Justice Bean, sitting in the High Court, who ruled that the Pensions Minister, John Hutton, had no power to reject the Parliamentary Ombudsman’s report. The Court directed that the Government reconsider the Ombudsman’s recommendation to provide recompense to all those members who had relied on the Government’s publications or who had relied on advice from others who did so.
ASW saga rumbles on
Many of the affected members were not eligible for the Pension Protection Fund (the PPF), which provides benefi ts to members where their employer commenced wind up on or after 6 April 2005. Prior to the changes announced by Chancellor of the Exchequer, Gordon Brown, in the 2007 Budget, most of the affected members were also unlikely to be able to benefi t from the Financial Assistance Scheme (FAS), a separate pensions emergency fund which offers fi nancial assistance to members whose scheme is under-funded at the time of wind up. To be eligible for FAS payments an individual must have been a member within 15 years of his normal retirement age or older on 14 May 2004. For those who did qualify, payments were restricted to 80% of their fi nal salary, capped at a maximum of £12,000 per year. However, in this year’s Budget, the Chancellor announced that FAS would benefi t from an extra £6 billion, and that the maximum annual level of benefi ts would be increased to £26,000. Under the proposed changes, all those who lost their pensions before May 2004 will now qualify for assistance from FAS.
However, annual payments will not rise with infl ation, meaning that the real value of pensions will decrease each year. The 80% salary cap on payments will also remain. Although the Government has made additional funding available through FAS, it has stopped short of agreeing a full payout to members who have lost out. This has led to fi erce criticism from some quarters with campaigners and opposition MPs arguing that the enhanced measures are not enough. From a political perspective at least, the Government may fi nd itself forced to increase benefi ts further. The Government had initially estimated the cost of compensating these workers to be £15 billion. However, the applicants believe the fi gure is nearer £3.7 billion at most, to be spread over 60 years with a peak cost, in net present value terms, of £100 million per annum. The additional money which has been ploughed into FAS (together with any further money which the Government makes available) may have some knock-on effects on the pensions industry.
PPF levy increases
One possible consequence is the need to raise additional revenue. Possible methods to achieve this include increasing corporation tax or further raising levies used to support the PPF. Levies are imposed on all eligible occupational pension schemes, with the amount they pay being determined by a number of factors including the risk of employer insolvency and scheme funding levels. However, levies have already been increased signifi cantly to £675 million for the year 2007-08 and the industry view is that they cannot be raised much higher.
Had the High Court decided that the Government was required to pay out full benefi ts, this could have led to the collapse of the PPF. Industry experts have suggested that the levy would have to rise to £3 billion - £4 billion to pay out full benefi ts, with employers being forced to increase their levy payments to the PPF to fund for this.
With many employers already struggling to fund their defi ned benefi t pension schemes, further expenses in the form of even higher PPF levies could force even more fi nancially unstable companies into insolvency, and over a period of time a situation of the ‘survival of the fi ttest’ may lead to only the strongest companies remaining solvent.
PPF benefi t reduction
Another possibility may be to reduce the level of benefi ts provided by the PPF. However, any reduction would be politically sensitive, making this an unlikely option given that a general election may be looming. The current level of compensation provided by the PPF allows members below normal retirement age receive 90% of their pension when they retire, and this amount is capped at £26,050 per annum on retirement at age 65. There are also restrictions on the increases to the level of compensation once in payment.
Although it has been mooted that the court system may become fl ooded with claims from pension scheme members following the High Court ruling, this seems unlikely. The ruling requires each individual to prove that he or she relied on misleading government information or on advice from others who so relied. Establishing this in practice will be a diffi cult evidential hurdle for claimants to overcome. Prior to the case being referred to the ECJ, a number of protective actions were brought by pension scheme members and trustees to preserve their position in the event that the ECJ ruled that any claims were subject to a time limit. Such claimants must now decide whether to pursue these claims in light of the High Court ruling.
The case is likely to have a practical impact on pension scheme trustees. In light of this ruling, and recent fi gures showing company insolvencies at record levels, trustees may have to negotiate harder with their sponsoring employer to obtain the necessary level of funding for their scheme and take particular care in the context of corporate restructurings or transactions. The continual monitoring of the ‘employer covenant’ will also be high on the trustee agenda going forward.=
It is unlikely that this litigation has been consigned to the history books just yet, with the Government having fi led an appeal against the High Court judgment. The appeal is said to be on the basis that the ruling raises important constitutional issues, which need to be resolved. The compensation currently offered through FAS together with any further benefi ts that may be made available to affected scheme members is expected to have a wide-ranging impact on the pensions industry, with employers and members likely to be affected. Given the already low confi dence in the pension system and a general election looming, the outcome of this long running saga is awaited with interest.