Pension Protection Fund wins latest appeal in long-running compensation saga

The Pension Protection Fund (PPF) can adopt a one-off value test for increasing compensation following the Hampshire decision, the Court of Appeal has confirmed – but provided it corresponds to at least 50% of a members' pre-insolvency entitlement to scheme benefits. It also held that the same test does not have to be applied to survivor benefits.

The Court of Appeal judgment (19 July 2021) in Secretary of State for Work and Pensions and the Pension Protection Fund v. Hughes and others upheld the decision of the High Court that the PPF compensation cap (as set out in legislation) constitutes unlawful age discrimination and so should be disapplied.

The judgment follows the High Court decision in June 2020 that the method used to make sure that each PPF member has compensation of at least 50% of the value of their original scheme benefits is permissible and that the PPF compensation cap was unlawful.

The Court of Justice of the EU made its landmark ruling in September 2018 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 Court of Appeal referred Grenville Holden Hampshire v the Board of the Pension Protection Fund to European Court of Justice in July 2016.

Questions considered

In this latest instalment of the long-running saga on how PPF compensation (as set out in legislation) should be calculated, the Court of Appeal was asked to consider the following questions:

1. Is the PPF under an obligation to provide at least 50% of the actual value, over time, of the benefits that a member would otherwise have received under their pension scheme, rather than 50% of the actuarially predicted value of those benefits and, if so, does that require the use of a "lifetime payments test"? (This was described in the High Court decision as a test identifying and dealing with the possibility that a member might ultimately receive less by way of compensation than 50% of what they would otherwise have received.)

2. Is the PPF required to put into payment an amount equivalent to at least 50% of the benefits which the survivor of a member receiving PPF compensation, at the date of their death, would otherwise have received from the member's pension scheme?

3. Was the challenge to the lawfulness of the PPF compensation cap brought substantially out of time such that it should be dismissed?

4. Should the lawfulness of the PPF compensation cap have been considered by reference to the Charter on Human Rights and general principles of EU law (that is, should it have been subject to domestic law only)?

5. Is the PPF compensation cap contrary to EU law because it results in discrimination on the grounds of age which is not objectively justified?

Decision on question one

The Court of Appeal held that the PPF methodology for increasing compensation could be based on a one-off actuarial valuation of members' benefits, in summary, on the basis that the wording of Article 8 of the EU Insolvency Directive (which requires Member States to take the necessary measures to protect the pre-insolvency occupational pension scheme rights of employees and former employees whose employer becomes insolvent) is "very general, open-textured and broad" and is indicative of the ""considerable discretion" in implementing its requirements which has been afforded to Member States."

The court also held that Article 8 seeks to protect the interests of employees and former employees at the date of the employer's insolvency in respect of their immediate or prospective rights to pension benefits; it does not refer to protection of the benefits themselves.

It also found that the High Court's conclusion that the PPF was required to provide at least 50% of the actual value over time of the benefits, rather than a one-off actuarially predicted value, was incorrect. As such, the PPF is entitled to use a one-off value test "as long as that one-off comparison satisfies the obligation imposed by Article 8 as interpreted in the case law."

However, the Court of Appeal added one caveat: as there was no challenge as part of the appeal to the assumptions used by the PPF, it expressed no view on these assumptions and so, in principle, the assumptions used by the PPF methodology were "not immune from challenge" in terms of whether they actually achieve the 50% one-off value requirement.

Question two: the decision

In relation to survivors, the Court of Appeal held that the High Court was "wrong in principle" to find that a survivor must receive PPF compensation equivalent to at least 50% of the survivor's benefit they would otherwise have received under the pension scheme, stating "there is no basis in the Directive, in Article 8, or in the case law, to suggest that the accrued entitlement is divisible and that each element should be valued and treated separately … At the date of insolvency, the survivors' rights remain inchoate. They form part of or, to put it in the words of Article 8, are "included" in the employee's entitlement … that right is to receive at least 50% of the compensation which her spouse was receiving. There is no right to return to the drawing board and calculate the survivor's compensation on the basis of the rules of the original scheme".

Findings on other questions

On questions three and four, the Court of Appeal refused the Secretary of State permission to appeal on these questions. In answer to question five, the Court of Appeal granted the Secretary of State permission to appeal, but then promptly dismissed the appeal finding that the High Court's reasoning on this issue to be sound.

As such, the PPF compensation cap (as set out in legislation) does amount to unlawful discrimination on the grounds of age. However, we understand that the Secretary of State has been granted until Friday 30 July 2021 to address the Court on certain issues related to this, such as the period of time over which the PPF compensation cap has to be disapplied.

Osborne Clarke comment

Although it is not yet clear whether any aspects of the Court of Appeal judgment will be appealed by the members or the Secretary of State, we expect the PPF to be pleased with the outcome as it allows it to continue with its current methodology.

The PPF has stated that it will provide further information on the implementation of the judgment as soon as they are able. (The PPF's initial response to the Court of Appeal judgment can be found here.)

The outcome of the Hughes decision is not only important to the PPF and to schemes in a PPF assessment period, but also to schemes that are in the process of considering a "PPF+" buy-out.

The findings of the Court of Appeal bring the ongoing assessment of PPF compensation back into line with the one-off actuarial valuation approach which is required by law when assessing the value of PPF compensation on the winding-up of a scheme that cannot secure full benefits (section 73, Pensions Act 1995).

Additionally, the funding uplift (relative to PPF compensation levels) that should arise from confirmation that the 50% value test does not have to be applied to survivors' benefits will also be welcome news in PPF+ cases, perhaps especially for schemes that are marginally funded above PPF compensation levels.

Osborne Clarke is a member of the PPF’s Legal Panel providing legal advice in all areas to the PPF and specialist pensions law advice jointly to the fund and trustees of schemes that have entered a PPF assessment period.

Additionally, Open Trustees Limited, a sister company to Osborne Clarke and a member of the PPF’s Trustee and Support Services Panel, is appointed by the PPF to act as trustee of schemes that have entered a PPF assessment period. Open Trustees is also on the Regulator’s list of approved trustees. If you would like any further information on Open Trustees or would like to consider them for an appointment, please contact the Managing Director, Jonathan Hazlett, using the details below.

If you would like further advice on anything covered in this update, please contact our PPF specialists Jonathan Hazlett or Joe Webster, whose contact details are below.