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UK pensions lifeboat’s cap on payouts ruled unlawful by ECJ

7 Sep 2018 By Lauren Brown

Priority must now be given to those who have been affected by limit, says former minister

A cap on compensation payable by the pensions lifeboat was ruled unlawful yesterday, in a Court of Justice of the European Union (ECJ) decision that will be likely welcomed by senior employees. 

The maximum payout from the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) was previously £35,000. However, the court decided that members of pension schemes with insolvent employers must receive at least 50 per cent of the value of their accrued old age pension.

Critics said the cap meant long-serving staff or those on higher wages often found themselves receiving much lower pension payouts than they were expecting. The ECJ ruling in Grenville Hampshire v The Board of the Pension Protection Fund will ensure this minority no longer loses out. 

Hampshire was employed from 1971 to 1998 by Turner & Newall (T&N). Throughout his employment, he was a member of the T&N supplementary occupational pension scheme.

Following a takeover by a US firm, an insolvency application was filed for T&N in the US in 2001. In July 2006, the PPF opened the assessment in the UK concerning the takeover of the pension scheme. 

As Hampshire had not attained the relevant pension age at the time, his compensation was capped at the then limit of £20,000. This represented a 67 per cent reduction on the £60,000 per year he would have received had his employer remained solvent. 

“Given that PPF has spoken about what to do with its surplus funds, a priority must be given to addressing the position of people such as Hampshire who could find themselves receiving less than half their pension due to the limited nature of the PPF,” said Steve Webb, Royal London’s director of policy and former pensions minister. 

Tom McPhail, head of policy at Hargreaves Lansdown, added: “It is to the credit of successive UK governments that we have a robust and reliable lifeboat scheme in place to protect pension scheme members in the event of their employer going bust. The PPF’s healthy surplus means it can take this hit without materially weakening its funding position.”

According to estimates cited by Hargreaves Landsdown, the judgment’s impact on the PPF’s coffers is expected to be minimal and increase liabilities by a maximum of 1 per cent. It is currently 122.8 per cent funded and has a surplus of £6.7 billion.

“The vast majority of PPF and FAS members will already receive compensation in excess of 50 per cent of their accrued old age benefits and we expect the number of members affected by this ruling to be very small,” a statement on the PPF’s website read. 

Also yesterday, Office for National Statistics (ONS) figures revealed that a record 41.1m people were members of an occupational pension scheme in 2017, up from 39.2m in 2016. However, the average amount paid into private sector defined contribution schemes dropped to 3.4 per cent, down from 4.2 per cent the year before. 

Royal London’s head of business development, Clare Moffat, warned that while April’s increases to the minimum amount paid under auto enrolment would alleviate some of this problem, “as it currently stands these increases will still not be enough to deliver a decent retirement income for the majority of people”. 

“People need to start thinking about the type of retirement they want to have and how much they need to save to achieve it,” she added. “Small regular increases can have a large impact on the quality of life in retirement.”

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