In brief

The Court of Appeal has given its ruling in the case of Secretary of State for Work and Pensions v Board of the Pension Protection Fund and others, in which both the Pension Protection Fund (PPF) and the Department for Work and Pensions (DWP) were appealing findings linked to the Hughes 2020 High Court judicial review decision.  The original case related to the way in which PPF compensation should be calculated and capped following the ECJ's Hampshire ruling from 2018[1].  The Hampshire ruling had established that each member of a DB pension scheme should receive PPF compensation which is at least equal to 50% of the pension to which they would have been entitled had their pension scheme not entered the PPF. 

 


The Court of Appeal agreed with the PPF on how the checks should be carried out to ensure that members were receiving 50% of their original pension.  However, it did not allow any of the grounds for appeal raised by the DWP, where the primary ground was an appeal against the earlier High Court decision that the PPF's monetary compensation cap (currently set at £41,461.07) (Compensation Cap) and which only applied before a member reached Normal Pension Age (NPA), was unlawful on the basis that it was age discriminatory.

It is not yet clear whether any of the parties will seek to appeal any aspect of the Court of Appeal's decision. The PPF has commented publicly that, as it is not yet clear over what period of time the Compensation Cap will have to be disapplied, it will continue to pay members their current level of benefits.

In practice, this case is only likely to be directly relevant to those members whose benefits may be due an uplift following the Hampshire litigation or who are otherwise affected by the Compensation Cap (either because they are in the PPF or because their benefits have been secured externally and linked to PPF compensation).   


Background

Following the outcome of the ECJ's ruling in the Hampshire case in 2018 that Member States had to guarantee members of DB schemes compensation at least equal to 50% of the value of the pension that would have been due to the member had their employer not gone insolvent, the PPF put in place an approach to address the ECJ's findings.  This approach was disputed by a group of claimants in 2020, who were either members or survivors of pension schemes whose employers had entered insolvency proceedings.  The claimants were successful in their judicial review claim and the High Court ruled that the Compensation Cap relevant to members below NPA was unlawful because it amounted to age discrimination.  Members over NPA at the date of insolvency were not subject to the same Compensation Cap.

It was also found by the High Court judge that the PPF's approach of applying a one-off actuarial test to assess whether the 50% "Hampshire test" was met was not legally compliant and further tests should be carried out to ensure payments were in excess of the minimum level over the lifetime of the member.  It was also found that the PPF had to ensure that survivors have a test applied to their benefits, separately to that applied to the main member's benefit, to ensure that they were receiving 50% of the value of the benefits that they would have been due had there been no insolvency.

The DWP appealed the High Court's finding that the Compensation Cap was unlawful and the PPF appealed in relation to the Court's findings regarding its proposed approach to address the uplifts due following the Hampshire decision. 

For completeness, it should be noted that there is a separate statutory cap on PPF compensation which provides that only 90% of pension can be provided as compensation where a member has not reached NPA at the date of insolvency.  This latter cap was not subject to challenge in this litigation.  It is also of note that the appeals in this case turned largely on rights arising under a European Directive.  These rights remain relevant because, despite the UK's exit from the European Union, rights arising under a Directive that were recognised as having "direct effect" on the UK (i.e. a citizen could enforce them directly without having to rely on UK domestic legislation) prior to 31 December 2020 remain part of UK law after this date.

What did the Court of Appeal decide?

The Court of Appeal allowed the PPF's appeal on the two substantive points raised and agreed that the PPF's proposed methodology was appropriate. 

On the point relating to whether the PPF could apply a one-off actuarial value test to check that the 50% "Hampshire test" had been met for a member, the Court analysed carefully the ECJ's findings in the Hampshire case and did not agree with the High Court that the ECJ had envisaged continued cross-checks against a member's benefits over time to test whether the 50% test had been met; a one-off "value" test was sufficient.  However, the Court did comment that the PPF's calculation would not be "immune from challenge".  It said that it was not expressing any view "as to how finely tuned the actuarial assumptions used in the PPF calculation must be to reality, or how broad or narrow might be any margin of judgment or discretion the PPF has in adopting such assumptions".

On the second substantive point appealed by the PPF, which related to whether the relevant European legislation required payment of a pension equivalent to no less than 50% of the benefits that the survivor of a member would have received under the pension scheme, the Court of Appeal also agreed with the PPF's arguments.  The PPF had determined that applying this additional test was unnecessary and that it used assumptions about whether a member would die leaving a survivor, and built that into its calculation of the value of the member's benefits.  This, according to the PPF, would ensure that the survivor would receive adequate benefits.  The Court of Appeal agreed and said that it did not consider that the European legislation intended to give "freestanding" protection to survivors' rights.  

However, the Court of Appeal judges dismissed the DWP's main point of appeal, agreeing with the High Court that the monetary Compensation Cap did constitute age discrimination and so was unlawful.   The Court agreed with the High Court that the Compensation Cap was not an "appropriate and necessary" means of achieving the aim of addressing "moral hazard" concerns, which would have been necessary to enable the age discriminatory approach to be lawful.  These concerns were that employers and other decision-makers might not otherwise properly fund their pension schemes if they knew that members would receive full benefits on insolvency in any eventuality.  

The DWP had raised two other grounds for appeal relating to (i) the delays from the claimants to challenge the Compensation Cap and (ii) the fact that decision under challenge did not engage EU law and so should have been subject to domestic law challenge only.  Both of these grounds were dismissed by the Court of Appeal.

Key takeaways

This case will be of considerable interest to the PPF and the DWP and to those groups of members whose benefits are linked to PPF compensation and are affected by either the Hampshire ruling or the Compensation Cap. 

It remains unclear whether any of the parties will seek to appeal any aspect of the case and it is possible that there will be a further judgment dealing with the period of time over which the Compensation Cap should be disapplied.

A copy of the judgment can be found HERE.