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A double victory for members of schemes in the PPF

Published: Wednesday 24 June 2020

The judgment of Mr Justice Lewis in Hughes and others v Board of the Pension Protection Fund [2020] EWHC 1598 (Admin), handed down on 22 June 2020, is of considerable importance for members of defined benefit schemes of insolvent employers. Thomas Seymour along with a counsel team from Blackstone Chambers (Tom de la Mare QC and Iain Steele), instructed by Farrers, acted for the British Airline Pilots Association (BALPA) representing pilots who were members of the Monarch and BMI Schemes, who brought proceedings for judicial review along with the claimants of other schemes. The proceedings, brought against the Pension Protection Fund (“PPF”)  with the Department of Work and Pensions (“DWP”) as an interested party, were heard at a five-day remote hearing in the Administrative Court in May.

Article 8 of EU Directive 2008/94/EC (“the Insolvency Directive”) requires member states to take measures to protect the pensions of employees and ex-employees of an employer, in the event of insolvency, including protection in respect of survivor’s benefits. It does not specify the method or extent of extent of protection. In a series of cases (Robins (2007), Hogan (2013) and Hampshire (2018)), the European Court of Justice (“ECJ”) has decided that whilst member states have some latitude as to the measure they put in place, and complete protection is not required, protection to the level of at least 50% of the benefits is required, including in respect of envisaged growth throughout the pension period, in order to comply with Article 8.

Against the background of the Directive, the Pension Act 2004 established the Pension Protection Fund, the so-called statutory lifeboat, funded by employers imposed on employers of other defined benefit schemes, and designed to provide a measure of compensation to members of schemes. Upon the insolvency event, the scheme was subject to assessment by a valuation mechanism which valued the assets of the scheme and the “protected liabilities”, being the estimated PPF compensation which would be payable if the scheme was transferred into the PPF. If protected liabilities exceeded assets, the scheme along with its assets is transferred to the PPF, the member’s trust rights are extinguished and the trustees discharged, and the member receives statutory compensation instead. The level of PPF compensation is based on the accrued entitlement and depends on age and status immediately before the assessment date/insolvency event. Members who have attained normal pension age (NPA) are entitled to 100% PPF compensation; those under NPA are entitled to 90% PPF compensation. The Act places a salary-related cap on compensation for those under NPA. The cap is fixed by reference to age 65, actuarially reduced where the compensation comes into payment before age 65, and is limited to 90% of the actuarially adjusted cap. The effect is that members subject to the cap may receive compensation amounting to a modest fraction of the benefits they receive; whereas a former colleague who may have attained NPA a few days earlier (entitled to 100%) is unaffected. The claimants challenged the validity of the Compensation Cap as contrary to Article 8 and as being age discriminatory.

Following the Hampshire decision in September 2018, no primary legislation was introduced but the PPF set in place an interim scheme designed to deliver the 50% uplift to affected members. This entailed a one-off actuarial valuation of each member’s pension benefits under the scheme as at the assessment date, based on the member’s actuarially assumed lifetime, and payment of an uplifted benefit which was “front-loaded” (to make up for PPF compensation having no increases on pre-1997 service). The claimants contended that this scheme failed to comply with EU law, in particular (a) because it failed to ensure that the member received at least 50% of his scheme benefits in each pension year; (b) because it would inevitably yield less than 50%, both on an annual basis, and on a cumulative receipts basis, for members who lived significantly beyond the assumed lifetime; (c) because it failed to protect survivor benefits.

The judge held:

1. That the Compensation Cap was unlawful from its inception, in that it failed to comply with Article 8 and was age discriminatory.

2. That the PPF’s interim scheme as it stood did not comply with Article 8, in particular:

(a) It needed a mechanism to ensure that the cumulative value of the compensation did not fall below 50% of the scheme benefits, and that the proposed scheme, as currently structured, on the PPF’s own admission, failed to achieve this for those who lived beyond the actuarially assumed lifetime.

(b) Survivor benefits must be protected to the minimum value of 50% of the survivors’ benefits under the Scheme. This is significant because PPF compensation only provides survivor benefit based on 50% of the member’s periodic compensation payable at the date of death, whereas (a) schemes commonly provide (as did all the schemes in question) survivor benefits based on the member’s pre-commutation benefit and (b) some schemes provide a survivor benefit of two-thirds (as did BMI).

The case is also of significance in relation to issues, relevant to the other claimants but not the BALPA claimants, of limitation of claims and the benefits payable by trustees of schemes whilst in assessment (S.138 PA 2004).

To download a copy of the judgment, please click here.