By Jane Beverley, Principal and Head of Research, XPS Pensions Group
The CJEU’s judgment indicated that the level of compensation payable by the PPF to each individual member must now be at least 50% of their accrued pension.
UK response to the judgement
Whilst the CJEU judgment was not unexpected, how the UK will respond to it is unclear. The next legal step is that the case will return to the UK’s Court of Appeal for it to consider the responses to the questions it had referred to the CJEU. There is, however, little doubt that the judgment will have to be implemented in the UK.
A Department for Work and Pensions (DWP) spokesperson said that the UK government was carefully examining the judgment with the PPF to determine precisely how best to implement it. The expectation is that the DWP will amend the legislative definition of PPF compensation in due course. However, with Brexit taking up a considerable amount of parliamentary time, it’s unlikely that amending primary legislation will be a priority.
The PPF issued a holding statement on the date of the judgment, indicating that it expects only a small number of members of the PPF to be affected by this ruling as the ‘vast majority’ already receive compensation in excess of 50% of their accrued pension. The statement also notes that the judgment will apply to members of the Financial Assistance Scheme (FAS), the scheme set up for members whose employers became insolvent before the PPF was established in 2005.
Implications of the judgment for pension schemes
It is unlikely that the CJEU judgment will have significant consequences for most schemes. However, where a scheme has a considerable number of members who are affected by the compensation cap (especially where there are also generous pre-1997 pension increases), the effects may be material, particularly in the following areas:
• PPF levies: the PPF indicated in its recent consultation on the 2019/20 levy that it would consider whether any changes to the section 179 (PPF levy) valuation guidance are needed once it is clear how the judgment will be implemented.
• Transfer values: some schemes reduce transfer values to reflect the level of underfunding in the scheme. It is common for these reductions to take account of the priority order in which benefits would be payable on wind-up, i.e. the amount that would be covered by PPF compensation is paid out first. Any changes to PPF compensation could therefore feed through to the level of reduction that should be applied to transfer values. Schemes which are significantly affected by the judgment may therefore wish to consider commissioning a new insufficiency report once the implications of the judgment are clear.
• Schemes in PPF assessment: scheme benefits will have been reduced to the level of PPF compensation during the assessment period. This may need to be revisited.
• Schemes in wind-up: schemes which are winding up outside the PPF will be reducing benefits using priority orders based on PPF compensation. Trustees may need to take legal advice on the impact of the judgment.
• Schemes that have already wound up: members may have received reduced benefits on the basis of PPF compensation rules.
Legal advice may be needed on whether there is any liability in respect of such members.
Implications of the judgment for the PPF
Given the relatively small number of members affected, it is not expected that the judgment will have significant implications on the funding of the PPF. It has been estimated that the ruling will add only 1% to the PPF’s liabilities. However, it is likely to have more significant implications for the calculation of PPF compensation, including paying back-payments to pensioners.
Whilst it should be relatively easy to check whether the capped pension exceeds 50% of scheme benefits or not, testing whether lower annual pension increases take the percentage of compensation below 50% is likely to be more challenging. It is not clear whether the PPF would need to carry out an annual test to check whether benefits fall below the 50% level, or whether it will be possible to carry out a one-off ‘value’ test when the compensation comes into payment and make any required adjustment for future differences in pension increases at that point.
Until it has been clarified how the judgment will be implemented in the UK, it may be difficult for schemes to know exactly how to respond.
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